Collateral Transfer an Overview

Collateral Transfer is the technical term for the misnomer that is a leased bank guarantee or a leased standby letter of credit. Collateral transfer is the transfer of an asset from one company, (the asset provider), to another company that is designated the beneficiary. These two companies enter into an agreement referred to as the Collateral Transfer Agreement. The word leased as in a Leased Bank Guarantee although incorrect has been around for years and is here to stay.

The beneficiary will usually borrow, rent or lease a Bank Guarantee for a period of one year and under the terms of the Collateral Transfer Agreement. The asset provider will instruct their bank to transfer the Bank Guarantee to the beneficiary’s bank for credit to their account. The beneficiary will have to pay a fee of circa 6% to the asset provider for use of the Bank Guarantee. This is known as the Collateral Transfer Fee.

In most cases the beneficiary will be looking to monetise the bank instrument so will request from the asset provider a Demand Bank Guarantee. This guarantee is specifically used for monetisation and the format contains exact and precise wording. Furthermore, the Demand Bank Guarantee is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). URDG is a synonym for Uniform Rules for Demand Guarantees and is set by the International Chamber of Commerce and adhered to by all major banks.

The beneficiary will then be able to apply to their bank for a loan or line of credit, (usually referred to as Credit Guarantee Facilities), offering the Bank Guarantee as security. The beneficiary will be expected to repay all outstanding Credit Guarantee Facilities before the expiry date of the Bank Guarantee.