Types of Collateral in a Collateral Transfer Agreement

Collateral Transfer involves the movement of a financial instrument from one company to another, where the lessee or beneficiary effectively “leases” the instrument, typically for one year. The entity leasing the instrument is commonly known as the Bank Guarantee Provider or SBLC Provider. A contractual arrangement, the Collateral Transfer Agreement, is established between the provider and beneficiary to enable the transfer of collateral.

There are two primary financial instruments employed in Collateral Transfer: a Demand Bank Guarantee and a Standby Letter of Credit. The Demand Bank Guarantee constitutes the majority of the “leased” bank instrument market.

Providers: Bank Guarantee Providers and SBLC Providers, recognized as entities like Hedge Funds, Sovereign Wealth Funds, larger Family Offices, and Private Equity Funds, offer collateral for Collateral Financing.

Demand Bank Guarantees: Utilized in Collateral Transfer, Demand Bank Guarantees enable companies to apply for loans and lines of credit, often referred to as Credit Guarantee Facilities. It serves as collateral to secure these facilities, being the only Bank Guarantee that can be monetized. Governed by ICC Uniform Rules for Demand Guarantees (URDG 758), it is payable on the first demand.

Standby Letter of Credit: A Standby Letter of Credit, issued by a bank, is primarily used to support international trade as a payment of last resort. If a buyer/importer lacks creditworthiness, a seller/exporter may request a Standby Letter of Credit in their favor. It serves as a guarantee of payment if the buyer fails to fulfill their obligations.

In Collateral Transfer, a Standby Letter of Credit can be leased for monetization purposes. When “leasing” it, the instrument assumes the characteristics of a Demand Bank Guarantee, acting as a guarantee of payment. It is governed by ICC Uniform Rules for Demand Guarantees (URDG 758) and is payable on the first demand.

If your company is facing financial challenges and your credit applications are being rejected, especially in the wake of the pandemic, we, based in Delhi, are experts in Collateral Transfer and have successfully facilitated access to loans and credit lines for over a decade. Feel free to reach out through our online inquiry form.