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What is a Leased Bank Guarantee?

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What is a Leased Bank Guarantee?

The lending and credit criteria of many banks and financial institutions have made the availability of credit extremely difficult to access. These difficulties can be overcome by employing the use of a Collateral Transfer or C/T Facility, which is the correct definition for Leased Bank Guarantees. Popular theories suggest the term Leased is derived from commercial leasing contracts that have comparable similarities to C/T Contracts. The mechanics of a C/T Contract is simple, where the owner of the asset, (The Provider), instructs their bank, (The Issuing Bank), to transfer the Bank Guarantee to the Receiving Bank, for account of the Beneficiary, (See what is a Bank Guarantee).

A C/T Contract states that the provider, for an agreed contract fee, will temporarily place their Bank Guarantee, for a predetermined period of time, on the account of the Beneficiary. At the expiry date of the Bank Guarantee, ownership will revert to the Provider. The Beneficiary utilises the Bank Guarantee as collateral for a number of purposes, the most popular being a loan or a line of credit, referred to as Credit Guarantee Facilities, and in such cases a Demand Bank Guarantee must be provided.

The availability of Providers is a perennial problem for companies looking for Credit Guarantee Facilities. These problems are alleviated through utilising the Collateral Contract Facility, which includes a data-base of Providers. Assets such as gold, silver, bonds, cash and other commodities and securities are utilised by providers such as Hedge and Sovereign Wealth Funds, Family Offices and Private Equity Funds to make available Bank Guarantees for C/T Contracts.

When a Beneficiary receives a Bank Guarantee it is applied as “Value Received”. The reason for this anomaly is that Bank Guarantees are not allowed to be traded and as such do not carry a credit rating. Lack of credit ratings make it difficult for some bankers to approve applications for loans or lines of credit. This is due to strict internal compliance and credit regulations, where the bank must apply the Issuing Bank’s credit rating to the Bank Guarantee, and if that rating is non-investment grade the bank will reject Credit Guarantee Facility applications. Happily, many banks do not adhere to these credit regulations and instead examine the Issuing Bank’s history on paying Bank Guarantees that have been called. A good track record will allow the bank to approve applications for Credit Facility Guarantees such as loans and lines of credit

The Provider, Beneficiary, Lender and Bank Guarantee are the major elements that make up a Collateral Transfer Facility, and together with the Provider’s and Beneficiary’s Bankers, who supply expert due diligence, the Collateral Transfer Facility model is one of today’s most successful products for raising Credit Guarantee Facilities.