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Definition of a Leased Financial Instrument

 

Leasing bank instruments involves the temporary assignment of a bank instrument for an agreed upon fee between the instrument owner (lessor) and prospective borrower (lessee). If the owner assigns the funds to a temporary beneficiary, that beneficiary may be able to show these funds for future transactions which require proof of sufficient capital.

 

The phrase “leased bank guarantee” refers to the process of borrowing the use of a “BG” for a predefined price and time period. Once the owner (lessor) leases the bank guarantee to the borrower (lessee), he collects a fee for the time the asset is encumbered. Since the borrower (lessee) has the asset in his name, he can then use the leased instrument as proof of collateral.

 

Together with the issuing bank, the lessor will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee for a set amount of money and over a set period of time, typically less than two years with the possibility of a roll-over. The issuing bank will send the guarantee to the borrower's (lessee’s)own bank, and the issuing bank then becomes a backer for debts incurred by the borrower, up to the guaranteed amount.

 

The fee is usually made up of an initial setup and bank fee and an annual fee, both of which will be a percentage of the dollar amount to be "guaranteed", or covered by the issuing bank in the event that the company can't promptly pay its debts.

 

This option for financial backing is typically only used by smaller enterprises that are desperate to expand operations or fund a specific project; they will have typically exhausted other opportunities to raise financing or obtain a letter of credit from their own bank.

 

Many top worldwide banks will lease bank guarantees, usually with a minimum amount of $5 million to $10 million, all the way up to $10 billion and more.

 

 

Credit Support Instruments and their use

 

We all know that in order to procure any kind of loan, whatever the form it be, the client must have some financial basis to back up the loan application. All lenders would expect that the client has a solid base for finance in place. This could be in form of land title deeds, or other assets like bank facilities, equipments, permits, pre-orders, etc, etc. All these have some monetary value and added together could meet the requirements for a loan application.

 

If the financial basis is not sufficient, collateral or a security instrument could be used. Properly structured legal framework could enable a leased instrument to be utilized; even it is termed to be a non-callable instrument. The true ownership is still in the hands of the instrument applicant, the lessor. The beneficiary (lessee) would then have limited holder-ship on the financial instrument.

 

Several legal structures could allow the use of it. An example could be the use on the basis of a JV-Agreement with the lessor, or a credit agreement if a bank funds it. In cases where the bank enhances the application by adding assets, it has to solidify the security provided. Thus, it is actually up to the funding entity to allow usage of said leased instrument and it be done by proper protocols.

 

It is the lessee’s responsibility to advise the receiving bank or funder that the instrument is non-callable, even if it is sent via SWIFT MT760.

 

Using life instruments

In fact there are other legitimate alternative instruments that can be used. You could make use of seasoned US T-STRIPS which in the market sells at around 15% to 22%, more or less. T-STRIPS are US Treasury Bonds with the interest stripped off and these come in 10-20-30 year terms. These instruments are seasoned, which means, they are already issued. So, here is a solid instrument that can be used/re-used for many projects for many years. And it is one that the client owns. At maturity time, the owner collects 100% from the FED.

Another instrument type is issued by top rated insurance companies. These are insurance guarantees in the format of a 4081 financial bond, or, even surety bonds. The client must present its project financial plan to the insurer for review and due diligence. But the client must also have some financial basis to begin with.

Depending on the client country's S&P rating, the insurance premium on getting an Insurance Guarantee is around 5%, plus/minus. In the money market such instruments have 80-90% monetary value. Some trusts will accept this as a basis for funding, also selective top lender.

 

Utilizing Hard Assets

It is also possible to make use of hard assets and turning it into a financial instrument. As land assets, which then needs an appraisal plus an insurance wrap, together with the land title deeds all put into the bank and have the bank issue a bank responsible SKR (Safe Keeping Receipt). Such a financial instrument is based on solid collateral. Other hard assets could be gold, diamonds, precious gemstones, even valuable paintings. Lab Certificate, appraisal, insurance wrap and ownership papers, all are deposited into a bank for safe keeping confirmed through a Safe Keeping Receipt. The success depends entirely on the market value and how this market value can be established and confirmed. This is often a very difficult task.

 

Security Lending

Other collaterals that can be used include public stocks on known stock exchanges. In a REPO transaction (Repurchase Transaction) you buy securities with the obligation to sell them at an agreed time and price back to the seller. In a borrowing of securities transaction the ownership does not change but their use is allowed under certain restrictions. The possibility of borrowing securities is very helpful in regards of certain derivative transactions and covers for synthetic transactions which settle within the hour of the start. However this can be an enhancement tool only.

 

 

NOTICE: We are not involved in their uses at the beneficiary's end and we give no warranty that they can be used as described, and we are not responsible if the client cannot use the L/C after it is issued. Our responsibility ends once the L/C is issued. We work on a full-disclosure basis and it is important that our clients fully understand that such L/Cs cannot be negotiated, presented or cashed until such time as the L/C applicant has received the full 100% cover. This is over and above any amount already paid as handling charges and commissions which are not refundable once the L/C is established.

 

NOTICE: This website is for general information purposes only. It should not represent any sort of professional advice, or an offer to buy, or an offer to invest, or a recommendation to engage in leasing of financial instruments. This website does not provide professional financial advice of any sort. By reading this website, you confirm that you are a qualified investor. All information presented on this website is subject to change without notice. Any concept described here is subject to availability at time of contract. All terms and warnings of our Disclaimer apply to this page and the entire website.

 

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