What is a Leased Bank Guarantee?

Leased or Leasing Bank Guarantees is a descriptive rather than a technical term, which is commonly alluded to, as the transaction resembles that of commercial leasing. The technical term is Collateral Transfer or C/T Facility, which is used when the owner of an asset, (The Provider or Applicant) requests their bank, (the Issuing Bank), to transfer a Bank Guarantee to another bank, (The Receiving Bank), for account of their client, (The Beneficiary), for an agreed term or period of time.

The beneficiary will pay the provider a contract fee, usually an annual fee, for the temporary ownership of the Bank Guarantee, which will revert back to the provider at the end of the term, or expiry date. In effect, the provider is placing their asset with the receiving bank in order for the beneficiary to boost the value of their balance sheet. If the beneficiary is utilising the Bank Guarantee to raise a loan or a line of credit, they will request the provider to transfer a Demand Bank Guarantee.

Providers of Leased Bank Guarantees are a diversified group, and range from Private Equity Funds, Family Offices, Hedge Funds, Sovereign Wealth Funds and those companies with a surfeit of assets. The Bank Guarantees are either issued against cash balances or against assets such as gold, silver and other commodities, unencumbered property portfolios and stock, share and bond portfolios.

Leased Bank Guarantees are non-tradeable assets, and as such do not carry a rating and are for “value received”. However, many lenders will for internal credit purposes, assign the issuing bank’s rating to the Bank Guarantee, and as such will decline a loan or credit line application if the bank rating is non-investment grade. However, there are myriad of lenders who do not look at the issuing bank’s rating, but at the bank’s history of reliability on honouring calls on their Bank Guarantees. If the Issuing Bank has a good record, then the lender will approve a line of credit using the Bank Guarantee as collateral.

Leasing Bank Guarantees through the Medium of The Collateral Transfer Facility is becoming an increasingly popular form of raising a line of credit or a loan, also known as Credit Guarantee Facilities. Bankers for the provider, and the beneficiary will due diligence both the Collateral Transfer and lending contracts ensuring a smooth transfer of both the Leased Bank Guarantee, and funds against the credit line.