Helping clients derive competitive advantage

Leasing a
Corporate Guarantee

Helping clients derive competitive advantage

Leasing a Corporate Guarantee

by admin
Leasing is not also a correct term to use as it is not possible to actually lease a corporate guarantee in this manner. It is another misnomer. But to make the people understand, we are also continuing this word. Actual term for this leasing is a “Transfer of a Corporate Guarantee”.

The bank will charge the asset and will raise a bank indemnity against it in favor of the Beneficiary. This bank indemnity will commonly be in the form of a Corporate Guarantee issued specifically for the purpose to the Beneficiary.

Transfer of Corporate Guarantee is the provision of assets from one party (The Provider) to another party (The Beneficiary) under a Transfer Agreement which will be called as Deed of Agreement (DOA). The Provider will effectively ‘lease’ his assets to the Beneficiary for a given term for a ‘rental.

Typically, the term of ‘lease’ would be 1 year but can often be as long as 3 or 5 years, depending on the willingness of the Provider.

At the end of the term, the Beneficiary will return the Guarantee or allow it to lapse and indemnify the Provider against any losses that may be caused by the Beneficiary utilizing the Guarantee or raising credit against it whilst it has been in his possession.

The DOA will govern the conditions of the transaction, namely the Beneficiary agrees to extinguish any lien of credit raised against the Corporate Guarantee prior to its expiry. The Beneficiary will make provision that any loans secured against it are repaid at the end of the term of the Agreement.

Therefore, the Corporate Guarantee being received by the Beneficiary is a Corporate Guarantee issued for it intended purpose (for credit lines, security, project funding etc.,). It should not be considered as a “Leased Corporate Guarantee”. Only the underlying assets of the Provider are effectively being leased. This means that credit lining or monetizing such guarantees are in no way different from credit lining other bank guarantees issued for the purposes of raising the credit.

Hence, Corporate Guarantee Transfers is an effective way for Providers to earn increased revenue from their assets and for Beneficiaries to raise bank credit.

Who Leases Corporate Guarantees

Traditionally, those sophisticated investors that hold large portfolios of assets such as medium to long term bonds generating low annuities may often be inclined to enter enhancement opportunities that allows them to receive additional returns over their portfolios. Generally these investors would enter into transfer agreements allowing their assets to be used by third parties who pay them a rental fee and who enter into contract with them.

This allows the investor to retain ownership of his assets and continue to receive his annuities thereon. In addition, the investor will receive additional returns from the rental fee giving him an enhanced return over his assets.

By collecting these assets into a pool and placing them with a world-renowned and acceptable bank, then investor will instruct the issue of a Corporate Guarantee using these assets as the security. This Corporate Guarantee will be sent to the receiving party. The receiving parties will often credit line the Corporate Guarantee in the usual way.

Investors may be motivated to enter into a transfer agreements due to under –performance of their existing portfolios or where their portfolio has no annuity or is lon-term. Some may be motivated by the quick returns that can be achieved.

Investors acting is this may be referred to as “Providers” of Corporate Guarantee. It is a growing area of Corporate Guarantees Management.

Why Leasing of Corporate Guarantees

Entrepreneurs may choose to adopt Leased Corporate Guarantees, as they often need to raise urgent business capital and do not always have adequate security to obtain it conventionally through standard commercial loans.

In comparison to normal asset lending and project finance, Leased Corporate Guarantee may be an easy solution for borrowing large amounts of funds quickly and without the time-consuming need for extensive underwriting or credit searches.

How to get a Leased Corporate Guarantee

One can get the Leased Corporate Guarantee by entering into transfer agreement with Investors/Providers, before that both parties will enter into DOA which states the leasing rates, credit line interests and other repayment conditions.

Costs of the Corporate Guarantee

The costs and charges of arranging leased corporate guarantees will largely depend on the Investor/Provider of the assets.

Depending on the status of the Investor and the quality of his portfolio being placed into the arrangement, it is common to attract investor’s interest at rates as low as 6% per annum to as high as around 12% per annum. This is a ‘rental’ fee and is generally paid every year, or for longer contracts may be payable in advance for the term. Of course the longer the term, the lower the charges.

Applicants would be expected to fund legal costs and any associated bank fees and transfer taxes (if applicable). It would not be advisable to enter into any type of transfer arrangement unless one could afford 0.25% of the amount they are seeking in advance and to ensure that they can sustain cost of borrowings at around 6% per annum, plus the costs of credit line interests of a further 3% per annum.

It is by no means a cheap way of borrowing, but it is quick and if done correctly can be very secure.

Neelesh
General Manager

I’ll help you start the right way with a customized plan to get your business moving forward.

 Top CSS Design Awards Nominee