IntaCapital: Credit lines against Bank Guarantees; common misunderstandings in ‘lease or leasing’

Posted on by IntaCapital Swiss

Whilst we experience a major up-turn in the popularity of using so-called ‘leased’ bank guarantees to secure credit lines, commercial loans and project finance, many borrowers and principals do not fully understand the concepts.

Firstly, there is no such thing as ‘lease’ or ‘leasing’ of bank guarantees. The correct term is Collateral Transfer. Where the Provider will effectively ‘transfer’ his asset for the use of it by another party in return for a fee. The term leasing bank guarantee is used as I guess the process is very much that of commercial leasing. In as much as the provider of the guarantee will request that it is either returned at the end of the period or allowed to lapse; allowing him to take back his underlying asset used to issue it in the first place.

Secondly, there is a lot of confusion as to the ‘acceptability’ of certain banks and their bank guarantees. When the borrower receives the guarantee, they will ask their receiving bank to credit line or monetize it. The borrowers request that bank guarantees must come from internationally recognised banks due to their rating. However, since bank guarantees are not listed securities or inter-changeable debt notes and further are issued only against ‘value received’, the banks rating is not important. Moreover, the quality of a bank guarantee will be attested by the issuing banks performance, i.e. has it defaulted on guarantees in the past?

It remains the fact that if the borrower was successful in receiving a bank guarantee from a top world bank such as HSBC, Deutsche Bank or alike to his account and requested his bank to advance credit against it as security; the bank may decline to offer credit if that bank holds existing debt exposure to that issuing bank. For example, if the receiving bank received a bank guarantee from HSBC for €10 million and at that moment in time HSBC held large liability to the receiving bank, the receiving bank may decline to increase that liability. Equally, if the guarantee was remitted by a small private bank (with little or no rating) and the receiving bank held no existing liability with that bank, they would be more inclined to accept it. It should be noted that most Private Swiss banks are not rated as they refuse to give sensitive financial information to rating companies such as S&P, Moody’s and D&B.

Bank Guarantees do not have individual ratings like, for example, MTN’s and Bonds. They are private inter-bank contracts. They are not listed or registered on Euroclear. They are not tradeable. They do not carry CUSIP or ISIN numbers, despite what you may read on unscrupulous internet sites.

For more information, there is a good independent site at Bank Guarantee Facts which contains very useful information for the novice.