Helping clients derive competitive advantage

Receiving a
Corporate Guarantee

Helping clients derive competitive advantage

Receiving a
Corporate Guarantee

by admin
If you are lucky enough to have a Corporate Guarantee issued to you, you will certainly know what it is for. Most commonly, landlords may receive Corporate Guarantees for rent deposits from their tenants for example. If you have entered into a separate contract for an investor to issue a Corporate Guarantee to secure a credit line, then you would have certainly executed contracts with them by this stage.

It is highly unlikely that a Corporate Guarantee will pop onto your bank account by surprise! If you do receive a Corporate Guarantee and have no idea why, you should contact your bank immediately.

In receiving a Corporate Guarantee, your bank will generally notify you and send you a copy of it (normally a SWIFT terminal printout) for your information. They will also inform you that it is verified and valid and will await your further instructions.

If you plan to receive a Corporate Guarantee, It is important that you bank with an international bank that understand them and can offer you a “private banking” service. Generally we would advise working with Swiss Banks who operate the procedure well.

If you are intending to receive a Corporate Guarantee from an “Investor” in order to secure a credit line or project funding, it is important to negotiate this facility with your bank before the Corporate Guarantee arrives. This will save time and expenses.

The Corporate Guarantee will normally be posted to a separate account in your name that the bank will open upon its arrival. It will be held on this account until it is either called for payment or it expires.

Risk of Receiving a Corporate Guarantee

The risks of receiving a Corporate Guarantee are 100% ZERO. The Issuing Bank carries all of the risk. Perhaps a few small bank charges will be there, there is no risk of loss by receiving a Corporate Guarantee.

Buying a Corporate Guarantee

It is not possible to purchase Corporate Guarantees. Not to be confused with leasing Corporate Guarantees, which under certain conditions is effectively possible. Put simply, Corporate Guarantee’s cannot be bought or sold.

If you are approached by a party claiming to be able to “sell” you a Corporate Guarantee, our advice is to dismiss that party and report them to the local Financial Authorities.

Trading Corporate Guarantee

Utilizing Corporate Guarantees directly into a “Trading Position” is not possible. However, to utilize a Corporate Guarantee to raise credit lines and then enter those funds into a trading position is of course very possible.

To trade a Corporate Guarantee, meaning to enter it into an investment program or structured investment product directly is not possible due to the fact that a Corporate Guarantee is not cash. It is a demand guarantee designed to offer a guarantee against a loss or condition. It cannot be transferable nor cannot be divisible. Therefore, as a demand guarantee, it has no value to invest.

Having said that, it is possible (depending on the wording and purpose of the Guarantee) to apply to raise a credit line or loan against it. With these borrowed funds, one can invest into trading positions and purchase investment notes and structured products. This form of borrowing can often add comfort to the bank as investments of this type can be designed to liquidate prior to expiry of the Guarantee to repay the credit or loan. Borrowing against Corporate Guarantee to invest structured products and notes where full capital protection is maintained is indeed a sensible opportunity.

Cash-Backed Corporate Guarantees

The term “Cash-Backed” Corporate Guarantee is a misnomer. Whether a Corporate Guarantee is issued on the strength of the instructing party pledging cash or stocks, bonds, other assets with his bank makes no difference to the acceptance of the Guarantee whatsoever. The Issuing Bank will honor the Guarantee according only to its wording and not related in any way to its underlying security.

Parties offering facilities where they refer to “Cash-Backed Instruments” should be avoided.

Neelesh
General Manager

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