Bank Guarantees (BGs)
Bank Guarantees (BGs)
Bank Guarantees (BGs) – Raise a Credit Line or Cash them in for real dollars.
Value conversion depends on many factors, some fixed, some floating such as:
- Ownership of BG – Corporate or Private – Corporate is Highly Preferred
- The Type of BG
- Issuing Bank Rating as well as location (branch) of Bank Issuing the BG
- Physical Location of the Original BG – Safety Deposit Box, Corporate Office Safe, Home, etc.
- If an Agent, Security House, or Third Party Bank is Holding BGs
- BG must be in US Dollars only
- Market Conditions
- Bank Policy
- Client anticipation of return
- Place transaction occurs
What is done with ‘Cash’ after conversion – this is becoming a paramount issue with banks
converting the instrument, the preferred and acceptable method is to deposit a portion
of the redeemed funds with the honouring bank, usually not less than 50% for a period
of not less than six (6) months.
Some Helpful Hints Before Starting….
- BGs are usually issued by a corporation as collateral.
- BGs held by individuals are highly questioned by banks throughout the world.
- It is generally easier to raise a ‘Credit Line’ than convert the instrument to CASH!
- Fluctuating World Market Conditions set the pace and determine the trading value, if any.
- Usually most every instrument can be converted, however, some are just Not desirable
Trading Instruments on the current World Market.
Substantiated “Documentation’ is needed for this type of transaction.
The Following Bank Guarantees are very difficult to do at the present, and only a ‘Credit Line’ could be raised:
- Any BG issued from any Indonesian Bank
- Any BG issued from any Thailand Bank
- Any BG issued from any Philippine Bank
- Any BG issued from any Malaysian Bank
- Any BG held by an Individual in lieu of a company, trust, corporation, or non-profit entity
The Following BGs Are NOT Currently Tradable:
- BGs issued from Russia
- BGs issued from Vietnam
- BGs issued from Cambodia
- BGs issued from Laos
- BGs issued from Burma
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).
Bank Guarantees for officially supported exports
Bank guarantees are used to secure an obligor’s payment to the creditor. They are written promises by the bank to satisfy the creditor in accordance with the terms of the guarantee in the event that the obligor fails to honour the specified obligations.
A direct bank guarantee by the export bank (i.e., one not guaranteed by another financial institution) is issued on the request of a principal for a guarantee from the export bank. The guarantee is a written promise made by the export bank in the letter of guarantee to satisfy the beneficiary on first request, without any need for court intervention, without protest and with recourse to the principal up to the sum specified if the principal fails to meet the specified obligation.
An indirect bank guarantee is issued where the beneficiary – a foreign importer, often a state organization – is located in a country whose statutes permit only a guarantee from a bank licensed locally. Upon written request by the exporter, the export bank applies for a guarantee from the foreign bank, provides the details for the guarantee to the beneficiary’s bank, and secures it with its own counter-guarantee.
The CEB provides primarily non-payment guarantees, such as:
are guarantees that insure the obligation of a winning bidder to enter into a contract. The bidder, under the terms of the tender, deposits a bond – in the form of a bank guarantee to the benefit of the tender organizer – which provides for compensation to the organizer should the winning bidder fail to sign a contract or fail to honour the bid conditions when entering into the contract.
insures the obligation of the bidder to duly perform the contact. With a performance bond, the bank can provide a guarantee during the term of the delivery or it can additionally cover the period of technical warranty of the goods supplied. It may be used to insure the supplier’s compliance with the contract terms or simply to guarantee compliance with specific technical standards set out in the contract. Performance from this type of guarantee involves reimbursement to the importer of an agreed portion of the purchase price.
Advance Payment Guarantee
insures the obligation of the seller to return the advance payment in case of failure to supply the goods on time or in their entirety. The bank agrees to return all or part of an advance payment made to the exporter by the importer (a deposit of part of the purchase price provided prior to the signing of a contract) in the event that the exporter fails to honour the contract terms in their entirety or in part and the exporter does not itself return the advance. CEB agrees to return the deposit to the importer along with interest imputed for the period from the date of the advance to the date of return, if applicable. The guarantee agreement may contain a clause that reduces the advance proportionately as the contract is performed.
Funding mega dollar projects utilizing bank guarantees (BGs) or other bank instruments
Another option for ‘Funding Mega Dollar Projects’ is to use Bank Guarantees (BGs), or similar Bank Instruments.
This is an excellent option for 3rd world countries. The government has a prime ‘Bank’ issue the Bank Guarantee to the Developer who was awarded the ‘Project’. This can be for any type of project:
- O.T. – Build, Operate, and Transfer
- O.O. – Build, Operate, and Own
- Environmental Project
- Construction Project
- Hospital or Medical Facility
- Development Project
- Quasi Government Project
- Government Project
- Nature and Natural Preservation Projects – Save the Rain Forest, Plant Tree Farms, etc.
In principle, this is how it works
The client may composite the value of the ‘Contract’ into a series of transactions utilizing Bank Guarantees (BGs) or similar Bank Instruments, whereby they (the client) do large project amounts ranging in increments of 20 to 100 million US Dollars utilizing corresponding Bank Instrument amounts.
However, the cash value (actual conversion amount) of each BG or Bank Instrument must be paid in full at time of every transaction for each of these larger projects. This is done in phases (stages over a period of time) during a predetermined schedule or life of the project.
The basic criteria would be a project or a series of projects rolled into one entity with a contract value of 200 million US dollars and above.
Since projects are generally time phased for payments, the first payment on a 200 million US Dollar project could be 20m. The client would have issued a Bank Instrument such as a BG for 20m. The ‘Bank Instrument’, such as a BG, is then converted to real working dollars based on the market value of the instrument at the time.