What is a ‘Leased’ Bank Guarantee?

As with similar guarantee asset classes, the Leased Bank Guarantee is a protection against non-payment. However, the description of the Leased Bank Guarantee is incorrect as the technical term is Collateral Transfer or C/T Contract, where the asset holder, (The Provider), instructs their bankers, (The Issuing Bank), to transfer a Bank Guarantee to the Receiving Bank, for account of the Beneficiary. The word leased, according to many financial historians, originates from commercial leasing contracts, which bear more than a passing resemblance to a C/T Contract.

A Collateral Transfer or C/T Contract, is a financial conduit for companies to raise a loan or a line of credit, alluded to as Credit Guarantee Facilities, however under such circumstances the Beneficiary must call for a Demand Bank Guarantee. The C/T Contract utilises Leased Bank Guarantees, and under the terms of the contract the Beneficiary must pay a contract fee to the Provider, as recompense for using the Leased Bank Guaranty on a temporary basis. The agreed term is usually one year and upon expiry ownership passes back to the provider.

A Provider or group of Providers of Leased Bank Guarantees are extremely difficult to source. There is no lexicon or data-base that provides this information, however, a fundamental component of the Collateral Transfer model is the unique access to Provider groups who range from Hedge, Private Equity and Sovereign Wealth Funds to Family Offices and Global Corporations who utilise their massive asset base as a means to issue Bank Guarantees.

Leased Bank Guarantees come under the heading “Non-Tradeable Asset”, and therefore the rating companies, (for example, Standard and Poors), are unable to issue a credit rating and as such, the Bank Guarantee is applied to the Beneficiary’s account as “Value Received”. Lending bankers due to credit and compliance constraints will look at the credit rating of the Issuing Bank, and if their rating is not Investment Grade, they are unlikely approve a loan or line of credit application. Sensibly, a diverse number of banks take a more relaxed view and prefer to examine the Issuing Banks record of honouring debt, and if a good track record will approve a line of credit application.

In today’s jungle that is the financial world, the Collateral Transfer model and its utilisation of Leased Bank Guarantees, has allowed companies to access Credit Guarantee Facilities that were previously unavailable. In conjunction with the Providers and Beneficiary’s bankers who provide an excellent due diligence service, lack of access to Credit Guarantee Facilities is a thing of the past.