What is a ‘Leased’ Bank Guarantee?

Collateral Transfer encompasses the term of ‘lease’ or ‘leasing’ as a descriptive term. Whilst it is not possible to physically lease a Bank Guarantee (BG) or Standby Letter of Credit (SBLC), it is possible to effectively import these bank instruments (BG’s and SBLCs) on a ‘rental’ basis.

Lease Bank Guarantee (BG) or Leasing Standby Letters of Credit (SBLC) are common phrases associated with Collateral Transfer. However, leasing is not really the correct terminology. It is not possible to actually lease a Bank Guarantee or Standby Letter of Credit as they are instruments representing an irrevocable payment undertaking by an issuing bank.

It is a misnomer. We use the term loosely as its process is almost exactly that of commercial leasing. In effect, the Provider offers temporary ownership of its assets to the Beneficiary in return for a fee (the “Leasing Fee”). The Beneficiary will then use this asset (which is represented as a Bank Guarantee or SBLC) to raise credit facilities (loans) with its own bank or a nominated lending institution.

It is a misnomer as in effect no leasing takes place. Through a Collateral Transfer Agreement, a Provider will agree to place his assets with a facilitating bank. The facilitating bank will then issue a Bank Guarantee to the Beneficiary’s bank, on behalf of the Provider. The Bank Guarantee is issued in the standard ICC format (URDG 758) or ISP98 / UCP600 format.

These Collateral Transfer (or C/T) facilities are useful for when a business needs to import or create security (collateral) to underpin credit lines or loans. In return for an agreed fee (Contract Fee), the Provider will instruct its bank to issue a Bank Guarantee to the Beneficiary’s designated bank account.

The Beneficiary may then use this Bank Guarantee as collateral security to obtain a loan or credit facility from their bank. At the end of the term (usually 1 year, extendable up to 5 or 7 years), the Beneficiary must repay the loan and allow the Bank Guarantee to expire unencumbered and without claim.

Key Benefits of Collateral Transfer

• Enables companies to secure financing when they lack adequate tangible collateral.
• Fast and efficient execution via interbank SWIFT network (MT760 / MT799).
• Renewable facility terms from 1 up to 7 years.
• Standardised internationally recognized formats governed by ICC URDG 758.
• Transparent fee structures with no loss of corporate equity or ownership control.