Collateral Transfer

 The Definition

Collateral Transfer is a unique way for companies being starved of credit facilities by their own bankers to access loans and line of credit. In todays market place credit facilities are a dwindling commodity. It is a fact that banks and other traditional lenders are significantly reducing their credit facility books.

Collateral Transfer has been around for many years. It is only in the last decade that it has become a much larger player in the credit facilities market. Many companies have never heard of this facility before as it has always been incorrectly referred to as leased bank guarantees. Collateral Transfer is the correct technical term for a leased bank guarantee.

Leased Bank Guarantee as a term is here to stay. Whilst not found in any financial lexicon it is thought to have derived its name from a commercial leasing contract. Financial historians suspect this is due to the many similarities it has with a leased bank guarantee contract. The conventional term for a leased bank guarantee contract is a Collateral Transfer Agreement.

How does it work?

Two companies, a provider and a company seeking a bank guarantee, (or a stand by letter of credit), sign a Collateral Transfer Agreement. The company seeking collateral is referred to as the beneficiary.

The beneficiary will effectively lease or rent the collateral from the provider usually for a period of one year. The beneficiary will have to pay the provider a fee for utilising the collateral. This fee is referred to as the Collateral Transfer Fee.

Once the collateral transfer agreement is signed the provider will instruct their bank to transmit the collateral by SWIFT to the beneficiary’s bank. Upon receipt of the bank guarantee or standby letter of credit the collateral will be applied to the beneficiary’s account.

For more information on Swift please go to format.

The Costs

The beneficiary must be aware of the costs to enter into a this type of agreement with the provider. Quite often there is a direct correlation between the credit rating of the issuing bank and the collateral transfer fee.

The higher the credit rating the higher the fee. Currently fees are in the region of 6% for leasing a bank guarantee or standby letter of for one year. Sometimes the beneficiary requires collateral whose issuer carries a high investment grade. In such cases the collateral transfer fee can be as high as 16% or more.

Another cost the beneficiary must be aware of is the cost of borrowing or annual interest rate. However, this will vary from year to year as the benchmark 12-month sterling Libor and 12-month Euribor are subject to market fluctuations.

Other costs the beneficiary must bear are booking fees, legal fees, arrangement and due diligence fees. Please note these fees are only charged in the first year. If the beneficiary rolls over the collateral into year two they must only pay the collateral transfer fee and one year’s cost of borrowing.