The ‘Lease’ or ‘Leasing’ of bank guarantees are undertaken through privately collateralised instruments. Collateral instruments are the provision of assets from one party (the Provider) to the other party (the Beneficiary) in the form of bank guarantees. The Provider may also agree (through the issuing bank) to issue a demand guarantee (the bank guarantee) to the Beneficiary in return for a ‘rental’ or ‘return’, known as the ‘Contract Fee’. The parties agree to enter into a Privately Collateralised Transfer Agreement (CTA) which governs the issuance of the Guarantee.
These bank guarantees are issued specifically for the purpose of the Beneficiary and each contract is bespoke. A Privately Collateralised Bank Guarantee is non-transferable, purchased or sold. A Privately Collateralised Bank Guarantee involves the Provider using their own assets to raise a specific bank guarantee through the issuing bank for the sole use of the specified Beneficiary and for a specified term. It is effectively a form of security-lending and often a derivative of re-hypothecation. There is no reference to ‘leasing’ when receiving a bank guarantee in this way.
The guarantee is issued by the issuing bank of the Provider to the Beneficiary’s account at the Beneficiary’s bank and is transmitted inter-bank via the appropriate SWIFT platform (MT760 in the case of guarantees). During the term of the guarantee, the Beneficiary may utilise it for their own purposes which may include security for loans, credit lines or for trading purposes. At the end of the term, the Beneficiary must agree to extinguish any encumbrance against the guarantee and allow it to lapse (or return it) prior to expiry and indemnify the Provider against any loss incurred by default of loans secured upon it.
A Provider will often be a collateral management firm, a hedge fund, a private investment or equity company. Effectively, the guarantee is ‘leased’ to the Beneficiary as a form of investment since the Provider receives a return on his commitment, hence the misnomer of the term ‘leasing’.
Over recent years, these instruments have become more popular since they enable the Beneficiary to have access to substantial credit lines by using the bank guarantee as loan security. Since the guarantee is effectively registered to the account of the Beneficiary, the underwriting criteria is considerably less than that of conventional lending.
Guarantees received in this way are in no way different from any other forms of demand guarantee. The underlying agreement (Privately Collateralised Transfer Agreement) has no bearing on the wording or construction of the guarantee. This allows the Beneficiary to use the guarantee to raise credit, to guarantee credit lines and loans, to enter trade positions or buy and sell contracts.
The fees for bank instruments and alternative solutions are between 6% -22%.