Helping clients derive competitive advantage

Issuing a
Corporate Guarantee

Helping clients derive competitive advantage

Issuing a Corporate Guarantee

by admin
Any Person or Corporate Entity with an account held at a mainstream bank can apply to issue a Corporate Guarantee provided they hold to their account adequate assets, there should be no reason why a Bank will reject an application to issue a Corporate Guarantee for bona-fide business purposes.

The account holder will simply request his bank to issue a Guarantee and supply them with the reasons behind its issue. The bank would have a simple application form for this service. The account holder will submit the application to the bank containing details of the underlying commitment being entered into whilst supplying the bank with information such as;

  • how long the Guarantee should be for,
  • any conditions on the payment
  • the amount and currency, and
  • details of the Beneficiary and their bank details etc.,

The Bank in-turn will request that the account holder enters into some form of pledge agreement with them. This means that before the bank agree to issue a Guarantee, the Bank would require a pledge or lien over assets of the account holder to secure the Guarantee. The assets acceptable for a bank to issue a Guarantee are generally liquid assets such as cash at bank, stocks and shares and bonds. In other words, assets that can be instantly liquidated. It is increasingly less common for banks to accept less liquid assets such as real estate property, although the decision to accept the asset is ultimately that of the bank.

In essence and for example, if an account holder wanted to issue a third party with a Corporate Guarantee for US$50 Million, it would be necessary to pledge cash, stocks or bonds to his bank for a minimum of this account. It is highly unlikely that a bank would agree to issue a Guarantee on behalf of their account holder without holding assets of equal or higher value. It is only “for value received”.

Once the bank has charged, likened or blocked the assets on the account holders bank account at the bank, the same bank will issue a Guarantee in accordance with their account holders specifications.

The Issuing Bank will remit the Corporate Guarantee to the Beneficiary Bank initially by SWIFT.

Normally, the Bank may pre-advise the Beneficiary Bank by sending a SWIFT MT-799 which is only a notice outlining the Issuing Banks instructions to remit a Guarantee, or to verify information in advance of the Issue.

The Issuing Bank will then send the Corporate Guarantee also by SWIFT MT760.

Most banks will also send an original paper copy by post to the Beneficiary Bank. It is courteous for the Beneficiary Bank to remit a message or letter back to the Issuing Bank confirming its safe receipt and acknowledgement.

Risk of the Issuer of a Corporate Guarantee:

The risks of issuing a Corporate Guarantee are simple. If a condition is met and/or on a demand for payment is made against your Corporate Guarantee by the Beneficiary, then the Issuing Banks will settle the debt, in part or in full. If this happens the risk of the issuing party is that his pledge of assets made to the bank will be lost. The bank will take possession of pledged assets upon settlement of the Guarantee.

Settlement of Corporate Guarantees can be made in part or in full. This means that a sum of money may be claimed under a Guarantee issued that is less than the amount of the Guarantee. In these circumstances, the issuer will only lose that amount of the pledged assets, plus a small bank charge. In the event that the full amount of the Guarantee is demanded, then all the pledged assets will be lost.

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