Reason behind naming it a ‘Leasing’ Bank Guarantee or Standby Letter of Credit?
The term ‘leasing’ in the context of Bank Guarantees and Collateral Transfer is a misnomer and should be avoided. The common phrases “Leasing Bank Guarantees” or “Leasing Standby Letters of Credit” are often associated with Collateral Transfer. However, using the term “leasing” is not entirely accurate, as it is not possible to lease a bank guarantee in this manner.
Although the term is used loosely, the process is akin to commercial leasing. In practice, the Provider temporarily transfers ownership of their assets to the Beneficiary in exchange for a fee. At the end of the term, the assets revert back to the ownership of the Provider. These assets are utilized to generate specific and non-transferable bank indemnities that the Beneficiary can use.
Despite the widespread use of the term ‘leasing’ in the context of Bank Guarantees, it is inaccurate because no actual leasing occurs. Through a Collateral Transfer Agreement, the Provider agrees to place their assets with a facilitating bank. The bank then charges the asset and raises a bank indemnity, often in the form of a Bank Guarantee, in favor of the Beneficiary.
Collateral Transfer (C/T) facilities, facilitated through this process, are beneficial when a business needs to import or create security (collateral) to support credit lines or loans, commonly known as monetization.