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What is Collateral Transfer?

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What is Collateral Transfer

Collateral Transfer is the technical term for what many refer to incorrectly as a Leased Standby Letter of Credit, or a Leased Bank Guarantee, and is the provision of assets from one party, the owner of the asset, (referred to as the Provider), to another party, (referred to as the Beneficiary).

For more information on the Provider, please got to “ Who are Providers”.

Financial historians suggest that the word Leased is derived from a Commercial Leasing Contract as it closely resembles that of a Leased Bank Guarantee contract. Although Leased Bank Guarantee or Leased Standby Letter of Credit will not be found in any financial almanac, the word leased when used in conjunction with a Bank Guarantee or Standby Letter of Credit has been around for years, and is here to stay.

The asset takes the form of a Leased Standby Letter of Credit, or more often a Leased Demand Bank Guarantee, and allows the Beneficiary to effectively rent or import the Bank Guarantee or Standby Letter of Credit, usually for a period of one year, which they may use as security to access loans and lines of credit, (often referred to as Credit Guarantee Facilities).

For more information on a Demand Bank Guarantee please got to “What is Collateral” and see under “Demand Bank Guarantees”.

The Provider and the Beneficiary enter into a contract known as a Collateral Transfer Agreement, which once signed, accordingly undergoes due diligence by the Provider’s bank, (the Issuing Bank), and the Beneficiary’s bank, (the Receiving Bank). Once due diligence has been completed, the Beneficiary under the terms of the Collateral Transfer Agreement, will pay the Provider an agreed sum for the use of the Bank Guarantee or Standby Letter of Credit, which is known as the Collateral Transfer Fee.

The mechanics of a Collateral Transfer Agreement are very straightforward, and once the agreement has been signed by both parties, the Provider will instruct their bankers to transfer by swift, a Standby Letter of Credit or Bank Guarantee to the Receiving Bank for application to the account of the Beneficiary. The Collateral Transfer Agreement has no impact or bearing on the usage of the Bank Guarantee or Standby Letter of Credit, therefore allowing the Beneficiary to utilise either instrument for their own purpose, which is usually to access loans and lines of credit, often alluded to as Credit Guarantee Facilities.