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What is a Leased Bank Guarantee?

What is a Leased Bank Guarantee?

Leased Bank Guarantees are tailor-made transactions, despite the fact that the word Leased is an incorrect analogy. The correct description for a Leased Bank Guarantee is Collateral Transfer or C/T Transaction where the owner of the asset, The Provider, instructs their bank (The Issuing Bank) to transfers a Bank Guarantee to the Receiving Bank for credit to the Beneficiary. Research into the history of Leased Bank Guarantees indicate that Leased is derived from a commercial leasing contract which bears a striking similarity to that of a C/T Contract.

In accordance with the stipulations contained within the C/T Contract, the Beneficiary will pay the provider an agreed contract fee to take temporary possession of the Bank Guarantee usually for one year and upon expiry the Provider will retake possession of the instrument. The Bank Guarantee is usually utilised to obtain a line of credit or a loan, commonly alluded to as Credit Guarantee Facilities, and in such instances the Beneficiary will have to obtain a Demand Bank Guarantee.

Under the terms of the Collateral Transfer Facility, a Provider will be sourced to supply a Bank Guarantee for the Beneficiary. There are numerous Providers across the financial spectrum such as Family Offices, Hedge Funds and Sovereign Wealth Funds, with access to vast asset bases enabling them to provide Bank Guarantees for the use as per the terms of the Collateral Transfer Contract.

As a Bank Guarantee is a private contract between the Provider and the Beneficiary, it is treated as a non-tradeable security and as such carries no credit rating and is applied to the Beneficiary’s account for “Value Received”. The Receiving Bank in some cases, uses the Issuing Banks rating as a yardstick to define the lending parameters and if the rating is not investment grade then loan and credit line applications will be rejected. Utilising a different set of parameters, other Receiving Banks will examine the history of Issuing Banks honouring calls on their Bank Guarantees. If the record shows the Issuing Bank has indeed honoured their commitments, loans and lines of credit applications will be approved.

It is essential to note, that the agreement between the Provider and the Beneficiary, is bound by the conditions held within the C/T Contract and working hand in hand with the Provider’s bank and the Beneficiary’s bank, who diligence the C/T Contract, a successful conclusion to the transaction is inevitable.

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