Collateral Transfer is a means by which one company transfers collateral to another company, for a pre-determined period of time, and is usually mistakenly referred to as a Leased Bank Guarantee, (See What Is a Leased Bank Guarantee). Collateral Transfer utilises the use of the Collateral Transfer Agreement, a contract between Party A, who provides the asset, (The Provider), and Part B, who receives the asset, (The Beneficiary). The asset is usually a Demand Bank Guarantee, (See What Is a Bank Guarantee), and upon expiry reverts to the ownership of the Provider. The Providers bank, (The Issuing Bank), and the Beneficiary’s bank both due diligence the Agreement, ensuring smooth running of the contract.

Upon successful conclusion of due diligence, The Beneficiary will instruct their bank to a pay a fee to the Provider, referred to as the Contract Fee, which is the cost the Provider charges for temporary use of the Bank Guarantee. The Provider will then instruct their bank to transfer the Bank Guarantee to the Beneficiary’s bank, utilising the interbank SWIFT system, (“Society for Worldwide Interbank Financial Telecommunications”), and the designated SWIFT message for transmitting Letters of Credit and Bank Guarantees, a MT 760.

The Collateral Transfer Agreement is an agreement between two parties to transfer a Demand Bank Guarantee, which is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758), and cannot affect the wording contained therein. The Beneficiary is therefore free to utilise the Demand Bank Guarantee for whatever is suitable for their business, usually an application for a loan or line of credit, referred to as Credit Guarantee Facilities.

Collateral Transfer is an innovative product, and due to the perspicacity of IntaCapital Swiss is now available to companies across the financial spectrum, due to their negotiating skills with The Providers, (Hedge Funds, Sovereign Wealth Funds, Private Equity Funds), who have dramatically reduced their fees for Collateral Transfer.

It has found a unique niche in the credit markets of today, and with IntaCapital Swiss offering this financial product to Europe, The Middle East, The Far East and South East Asia, companies across the globe now have access to Credit Guarantee Facilities, that before were unavailable.

It is generally acknowledged that IntaCapital Swiss are market leaders in Collateral Transfer and Collateral Transfer Agreements. When a company wishes to lease a Bank Guarantee, (See What Is a Leased Bank Guarantee), they will sign a Collateral Transfer Agreement, where they will be designated as the Beneficiary, and their counterpart, who will supply the Bank Guarantee, (See What Is a Bank Guarantee), will be designated as the Provider.

In most Collateral Transfer Agreements, the Bank Guarantee generally has an expiry date of one year. However, if the Beneficiary feels it necessary to renew the contract for a second year, it is imperative they inform IntaCapital Swiss at least a month before expiry of the contract, so they may obtain the necessary agreements from both the Provider and the Lender. Both the Provider and the Beneficiary can sign a Collateral Transfer Agreement which has an expiry date of two years and up to seven years, and providing all the Terms and Conditions are met, will renew automatically.

At with all Collateral Transfer Agreements, there are certain costs that must be borne by the Beneficiary. These costs are broken down into, the Provider’s fees, one year’s interest payable to the Lender, arrangement fees, legal fees, due diligence and booking fees. However, if the Bank Guarantee is renewed for a second year, (up to and including seven years), the Beneficiary is only liable for the Provider’s fees and one year’s cost of borrowing.

On average it is apparent that the Provider’s fees remain roughly the same. However, the cost of borrowing for one year’s Libor and one year’s Euribor will change from year to year due to market conditions. It therefore falls to the Beneficiary to pay any increase in the cost of borrowing at the time of renewing the Collateral Transfer Agreement.