Leasing Bank Guarantee or Standby Letter of Credit is where a Provider agrees to utilise his assets to the benefit of a third party, namely the Beneficiary through a Collateral Transfer Agreement and involves the 'transfer' of the original asset (the 'collateral') into a new security that the Beneficiary can utilise. Hence the term "Collateral Transfer".
This is done by the Provider of the original or underlying asset pledging the asset to the facility bank (the Issuing Bank) in order that the Provider can instruct the remittance of a Bank Guarantee or Standby Letter of Credit (SBLC) to the Beneficiary and his Recipient Bank. The Bank Guarantee or SBLC that results can be used in any way by the Beneficiary. The underlying asset pledged to the Issuing Bank may be cash, bonds, stocks, gold or other assets (or often a combination of many) and is provided by the "Provider". The Provider can be a private equity or investment group or a collateral management company making investments on behalf of its clients(investors seeking to make good returns on their assest who entrusts their assets with the Provider) . The Provider will often receive the assets through private label funds set up for the purpose, or from hedge funds, pension funds or high net worth individuals and will use his bank relationship to pledge these assets to the Issuing Bank to have them issue a Bank Guarantee or SBLC to the Beneficiary for a given term (usually 1 year and 1 day renewable terms).
Leasing Bank Guarantee and Standby Letter of Credit can be used for a variety of purposes as follows:
Raising Loans and Credit Lines
Security for other credit facilities such as trade finance
Surety and other third party financial commitments
Trading and overdraft security
Bank Guarantees or Standby Letter of Credit received under Collateral Transfer facilities may be used by the Beneficiaries to secure credit lines at their bank. Typically, the beneficiary's bank will have no objection to offering credit against Bank Guarantees received in this manner up to 100% of face value, less of course advance interest charges and bank fees. However, typically lending rates (loan to value or LTV) will be around 80% to 90% of face value of the Bank Guarantee or Standby Letter of Credit in question.
The Bank Guarantees or Standby Letter of Credit that are issued under these types of facilities are worded specifically to secure credit lines. They are issued under ICC758 protocol and are readily accepted by all international and private banks.
It is important to note that although the Bank Guarantee or Standby Letter of Credit is obtained through a lease agreement (collateral transfer), this has no bearing on the quality of the Bank Guarantee or Standby Letter of Credit and can still be used to raise credit and loans. As the verbiage of the instrument will be ICC758 standard approved wording, there will be no mention of 'lease' within the instrument itself. Remember, 'leasing' is a misnomer and is never a phrase used in these facilities.