Bank Guarantee/ Standby Letter of Credit

The term "leasing" of a Bank Guarantee (BG) or Standby Letter of Credit (SBLC) is widely used but is a misnomer as there is no reference to a lease in the contract between a Provider and client. What is meant is that the client has the unrestricted ownership of the bank instrument for a period of 1 year (but has to return it to the issuing bank before expiry). As far as the receiving (monetising) bank is concerned, the BG/ SBLC is cash backed and is delivered to the beneficiary account for which a loan or credit line is granted. 

The Provider agrees to use his assets for the benefit of a third party, the Beneficiary. This is achieved through a Collateral Transfer Agreement whereby the Provider pledges assets to the issuing bank  and instructs the issue of a Bank Guarantee or Standby Letter of Credit to the Beneficiary and his receiving bank. The underlying assets pledged to the issuing Bank may be in the form of cash, bonds, stocks, gold or other assets. The contract between the Provider and Beneficiary for the given term binds the Beneficiary to accept the terms of the issue of the BG/ SBLC and to pay a service charge to the Provider for its use. 

We are able to arrange the issue of a Bank Guarantee or Standby Letter of Credit from a Top 50 World Bank for a term of 1 year. The minimum value is US$ 100 million and the cost quoted will depend upon the value required but typically ranges between 10% - 12% including a 2% fee.

A distinction must be made between owned and leased bank instruments. Where a BG/ SBLC is owned by a client and being monetised i.e sold, the buyer will not have a problem in drawing down a line of credit from his bank as the instrument will serve as security and is callable by the beneficiary at maturity date. 

In the case of a leased BG/ SBLC which has to be returned to the issuing bank prior to maturity, the monetiser has the responsibility of repaying the credit facility to his bank and will not pay the BG/ SBLC applicant a non-recourse cash sum. However, this issue can be overcome by the client entering into a Joint Venture Private Placement Program with the funder.

For a BG/ SBLC buy/ sell transaction, the monetisation process typically takes 5 - 10 banking days from receipt of a completed Client Information Sheet. In the case of BG/ SBLC funding via a PPP, the process will take 15 - 20 banking days.