Leasing is not really the correct term to use as it is not possible to actually lease a bank guarantee in this manner. It is a misnomer. We use the term loosely as its process is almost exactly that of commercial leasing. In effect, the Provider offers temporary ownership of his assets to the Beneficiary in return for a fee and at the end of the term the assets revert back to the ownership of the Provider. The assets are used to raise specific and non-transferable bank indemnities which the Beneficiary may utilise.
It is a misnomer as in effect no leasing takes place. Through a Collateral Transfer Agreement, a Provider will agree to place his assets with a facilitating bank.
The bank will charge the asset and will raise a bank indemnity against it in favour of the Beneficiary. This bank indemnity will commonly be in the form of a Bank Guarantee issued specifically for the purpose to the Beneficiary.
Collateral Transfer or Collateral Provision is the provision of assets from one party (the Provider) to another party (the Beneficiary) under a Collateral Transfer Agreement. The Provider will effectively ‘lease’ his assets to the Beneficiary for a given term for a ‘rental’ or collateral fee.
Typically, the term of ‘lease’ would be 1 year but this can often be as long as 3 or 5 years, depending on the willingness of the Provider.
At the end of the term, the Beneficiary will return the collateral or allow it to lapse and indemnify the Provider against any losses that may be caused by the Beneficiary utilising the collateral or raising credit against it whilst it has been in his possession.
The Collateral Transfer Agreement will govern the conditions of the transaction, namely that the Beneficiary agrees to extinguish any lien or credit raised against the Bank Guarantee prior to its expiry. The Beneficiary will make provision that any loans secured against it are repaid at the end of the term of the Agreement.
Therefore, the Bank Guarantee being received by the Beneficiary is a Bank Guarantee issued for its intended purpose (for credit lines, security, etc). It should not be considered as a ‘leased bank guarantee’. Only the underlying assets of the Provider are effectively being leased (by definition of the word). This means that credit lining (or monetising) such bank guarantees are in no way different from credit lining other bank guarantees issued for the purposes of raising credit.
Collateral Transfer therefore is an effective way for Providers to earn increased revenue from their assets and for Beneficiaries to raise bank credit.