Collateral Transfer – Explained
The transfer of collateral from one party to another is referred to as Collateral Transfer, not as its commonly used namesake, Leased Bank Guarantee. The two parties enter into a contract, the Collateral Transfer Agreement, whereby the owner of the asset, Party A, agrees to lend the asset, usually a Demand Bank Guarantee, to Party B, the Beneficiary, for a temporary period of time, at the end of which ownership of the asset returns to the Provider.
It is common for the Provider’s bank, (The Issuing Bank), and the Beneficiary’s bank, (The Receiving Bank), to due diligence the Agreement, and if satisfactory the Beneficiary will pay the Provider a Contract Fee, representing payment for the use of the Bank Guarantee. The Issuing Bank transfers the Bank Guarantee to The Receiving Bank via the SWIFT system, (“Society for Worldwide Interbank Financial Telecommunications”), utilising the dedicated swift message MT 760, used for transmitting Bank Guarantees and Letters of Credit.
The Demand Bank Guarantee, governed by ICC Uniform Rules for Demand Guarantees, (URDG 758), has a dedicated format, allowing the Beneficiary to use the instrument for a variety of purposes and therefore is not bound by the verbiage of the Agreement. The usual utilisation of a Demand Bank Guarantee by the Beneficiary, is to apply for loans and lines of credit, alluded to as Credit Guarantee Facilities.
Collateral charges or Contract Fees have been reduced by the Providers, who range from Hedge Funds, Sovereign Wealth Funds to Larger Family Offices, and these cheaper fees have made access to Collateral Transfer a lot less demanding for those companies who were unable to finance a the Agreement.
The success of Collateral Transfer can be measured on a global basis. IntaCapital Swiss, utilising their ever-popular and cutting-edge Collateral Transfer Facility, have been retained by companies for many different parts of the world, who are now enjoying access Credit Guarantee Facilities with either loans or credit lines which in the past have been denied by banks and other financial institutions.