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What is leased bank guarantee?

IntaCapital Swiss SA is a boutique finance company head-quartered in the heart of Geneva, Switzerland and with representation world-wide.

Using Asset(s) for leased bank guarantee

The word Leased as in a Leased Bank Guarantee, whilst enshrined in banking folklore, is in fact an incorrect definition of this instrument. The correct technical definition is Collateral Transfer or C/T Facility. It is assumed this incorrect description has been plagiarised from a commercial leasing contract which has many similarities with the C/T Contract. The Leased Bank Guarantee is utilised via the incredibly popular C/T Contract to provide loans and lines of credit, also known as Credit Guarantee Facilities.

Under the terms of a C/T Contract, the Beneficiary must pay a contract fee for the temporary use of the Bank Guarantee. The owner of the asset, The Provider instructs his bank, The Issuing Bank to transfer a Bank Guarantee to the Beneficiary. At expiry of the Bank Guarantee, the ownership of the asset reverts to the Provider. If the Bank Guarantee is being used as security to raise Credit Guarantee Facilities, such as a line of credit, then the Beneficiary must request a Demand Bank Guarantee.

The Providers of Bank Guarantees are an important component of the model that is the Collateral Transfer Facility as without them there would be no facility to offer companies wishing to raise Credit Guarantee Facilities. Hedge Funds, Private Equity Funds, Sovereign Wealth Funds and Family Offices make up the bulk of the Providers, and it is their access to differing asset classes such as, bonds, cash, gold, MTN’s and other securities that allow them to provide Bank Guarantees to the Beneficiaries of Collateral Transfer Contracts.

On most occasions, banks apply Bank Guarantees to the Beneficiaries account as for “Value Received”, as a Bank Guarantee is a non-tradeable instrument and therefore has no credit rating. Under internal compliance rules some banks must apply the credit rating of the Issuing Bank to the Bank Guarantee and if that credit rating is of non-investment grade the bank will baulk at approving a line of credit application. A lot of other banks ignore the credit rating issue and examine the track record of the Issuing Bank honouring calls on their Bank Guarantees. A good history will allow the lending bank to approve a loan or a line of credit application.

Utilising the increasingly popular medium that is the Collateral Transfer or C/T Facility, companies have a greater access to Credit Guarantee Facilities than they have in the past. The application of expert due diligence by both the Issuing and Receiving Banks, has ensured successful completions of Collateral Transfer Contracts.