The word “Leased” has over the years, become a permanent fixture where a company takes temporary ownership of a Bank Guarantee. Lease Bank Guarantee is a loose description for the technical term Collateral Transfer or C/T Facility, (See Collateral Transfer), and has evolved due to the close resemblance to a commercial leasing transaction. A C/T Facility is a simple transaction where the owner of the asset, (The Provider), instructs his bank, (The Issuing Bank), to transfer a Bank Guarantee to another Bank, (The Receiving Bank), in favour of their client, (The Beneficiary).

Under the terms of the contract, the Beneficiary will pay the Provider a contract fee, (usually for a period of one year), for the use of a Bank Guarantee. At the end of the period or expiry date, the Bank Guarantee reverts to the ownership of the Provider. Basically, the contract reflects a request from the beneficiary to the Provider, to temporarily place his asset, (The Leased Bank Guarantee), with the Receiving Bank so the Beneficiary may enhance their Balance Sheet, or as in most cases apply for a line of credit. If the beneficiary requires a line of credit, the Beneficiary will request the Provider to instruct their Bank to issue a Demand Guarantee.

A Lease Bank Guarantee is not difficult to obtain providing the Provider and the Beneficiary both have acceptable reputations. Providers come from all parts of the financial community such as Sovereign Wealth Funds, Private Equity Funds, Hedge Funds, Family Office’s and large international corporations. This cross-section of wealth own assets such as commodities, cash, properties, stocks and bonds to use as collateral for issuing Leased Bank Guarantees.

The credit rating of the Issuing Banks can often affect the decision-making process by the Receiving Bank regarding the approval of a loan or a line of credit, referred to as Credit Guarantee Facilities. Under ICC regulations, Bank Guarantees cannot be bought or sold on the financial markets and therefore do not carry a credit rating and as such when applied to the Beneficiary’s account are for “Value Received”. The compliance and credit departments of various banks will often apply the Issuing Banks credit rating to the Bank Guarantee, and if it is not investment grade, have been known to refuse loan and credit line applications. However, many financial institutions will examine the Issuing’s Banks history of paying against a call on their guarantee, and if they have a reputable performance, they will approve a loan or credit line application.

Collateral Transfer or C/T Facility is becoming the go to product for more and more companies looking to raise Credit Guarantee Facilities. The Credit Line and Collateral Transfer contracts will be examined by both the Provider’s and Beneficiary’s Bankers ensuring a smooth passage through the various stages of the contract resulting in a successful outcome for both the Beneficiary and Provider.