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Collateral Transfer

IntaCapital Swiss is a well-known boutique finance house based in the heart of Geneva’s Switzerland financial district. They incorporate into their business philosophy all the doctrines of the traditional Swiss banking system being strength, reliability, integrity, performance, discretion and excellence.

An Explanation

Most companies have never heard of Collateral Transfer. The reason for this is because for decades it has been incorrectly referred to as leased bank guarantees and to leased standby letters of credit.

Experts suggest that the word leased is derived from a commercial leasing contract. There are many similarities between a commercial leasing contract and a leased bank guarantee contract. The term leased bank guarantee is now used in everyday financial parlance.

Collateral Transfer is a medium used by companies to access credit facilities. Many of these companies have been denied credit facilities by their own banks and other traditional lenders. With the onset of Covid 19, credit facilities are a shrinking market thus collateral transfer has become exceptionally popular.

Collateral Transfer is effectively where one company can lease a bank guarantee or standby letter of credit from a provider. This company will be seeking credit facilities. In order to lease a bank instrument. They will have to enter into a contract with a provider.

This contract is known as a Collateral Transfer Agreement. It is a contract between the provider and another company referenced as the beneficiary. The beneficiary will pay a fee to the provider for the use of the Bank Guarantee or standby letter of credit. This fee is known as the Collateral Transfer Fee.

Both the provider and the beneficiary will sign the agreement. Once signed the provider will instruct their bank to transfer the bank guarantee. The bank will transfer the bank guarantee directly to the beneficiary’s bank by SWIFT. Once received the bank will apply the bank guarantee to the beneficiary’s account.

For more information on SWIFT please go to Format

What Does Collateral Transfer Cost?

The facility is not particularly cheap. However, put in context with the potential returns it is in fact value for money. There are three separate sets of costs to consider before signing a Collateral Transfer Agreement.

The first cost is the Collateral Transfer fee. This fee is directly linked to the credit rating of the issuing bank. If the rating is senior investment grade the fee can be 16% – 20% or more. However, the lower the credit rating the lower the collateral transfer fee. Companies are currently paying in the region of 6%.

The second cost is the cost of borrowing for one year. This cost will be 12-month Euribor or 12-month Stirling Libor plus whatever premium is added on by the lender. This figure will vary from year to year as market sentiment will impact on both interest rates.

The last set of costs are administration costs. These are made up of legal fees, arrangement fees, due diligence fees and booking fees. The overall cost to the beneficiary in the first year is circa 13% – 14%.

If the beneficiary leases a two year guarantee or rolls the guarantee over into a second year the costs are lower. In the second year the beneficiary is only liable for the fee and one year’s cost of borrowing.