Fidelity Finance Company: International firms turn to Collateral Transfer to raise Project Finance

(‘Leasing’ Bank Guarantees)

At this time of economic hardship and uncertainty, international companies are turning to sophisticated investors to raise adequate collateral through collateral transfer arrangements (‘lease of bank guarantees’) and securities lending to raise their much needed project capital.

It is common knowledge that lending banks, private equity investors and private lenders have all restricted their books. It is no longer attractive to place large investments into real estate or long-term assets without a short-term or instant repayment vehicle being offered alongside.

Not only as real estate, property sales and developments have become a higher risk, but also recently assets in foreign lands have also come under the attack of political risk. Mainly due to the financial condition of the state. Cyprus for example has been in the news for this reason, albeit news reports are leaning far toward the negative of what the real position actually is. Investors are now concerned that not only the value of such investment or security may be under threat, but moreover political challenge of the ownership and taxation of it may also be a potential threat to lenders’ security.

Over recent months there has been a significant up-turn in the applications for collateral transfer and ‘leasing’ bank guarantee proposals. These facilities involve two parties and their respective bankers. Whereby, the Applicant will apply to receive collateral, often in the form of a demand guarantee (a Credit Facilities Bank Guarantee) from the Provider in return of the payment of a Contract Fee (or usage fee) to the owner of the underlying asset. The Provider will place his assets with his issuing bank and instruct his bank to issue to the Applicant’s receiving bank a Bank Indemnity or Guarantee secured thereon. The Applicants receiving bank will then be more than happy to extend the required credit and loans against this readily callable security.

These are often injected by the Provider (typically a private equity company) as indirect guarantees. The main benefit to the equity provider is that by offering his investment in this manner, he retains control of the actual cash or underlying asset as the recipient bank then holds an interest in his investment being repaid. The other alternative for the equity provider is to remit cash sums to applicants under credit or loan agreements and rely on the strength of his security, typically real estate property or liens over shareholdings, etc. in the event of default.

However, the down side is that of increased costs of the borrowers. Not only do they suffer the loan interest charges but also some additional five or six percent in fees for the usage of the collateral. This increases costs (often doubles them) but assures a successful outcome to their funding requirements.

This method of making investments is rapidly growing. However, many mainstream bankers are still yet to take advantage of their position in making these transactions. There is a real growing market for bankers to literally ‘market make’ a position in this niche corner of the banking world.