Monetising Leased Securities
Monetising leased securities is a simple transaction. A bank can offer loans and lines of credit to their client, (the beneficiary), against the security of a bank guaranty or standby letter of credit. These facilities are often alluded to as Credit Guarantee Facilities.
Sometimes other financial institutions who are not the beneficiary’s bankers will offer Credit Guarantee Facilities to the beneficiary. These institutions are referred to as third party lenders.
Monetising a Demand Bank Guarantee
The beneficiary’s bank will only monetise a bank guarantee if it is a Demand Bank Guarantee. This is a special bank instrument issued solely for the purpose of credit lining or monetising.
The format contains clear, precise and detailed wording. The demand bank guarantee is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). It is payable on first demand.
The leased demand bank guarantee has now been applied to the beneficiary’s account. The beneficiary is now able to apply to their bank for Credit Guarantee Facilities. As security for a loan or line of credit they can offer the demand bank guarantee as adequate collateral.
Monetising a Standby Letter of Credit
Monetising a Standby Letter of Credit is done in the exact same way as monetising a demand bank guarantee. They are of course two totally different bank instruments. However, the verbiage contained within the format of a standby letter of credit will be exactly the same as that of a demand bank guarantee.
Consequently, the standby letter of credit will be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). It will be payable on first demand.
For a detailed description of a Demand Bank Guarantee and URDG758 please go to Format.
Monetisation – Different Bank Instruments
A standby letter of credit, (SBLC), and a documentary letter of credit, DLC), both underpin trade finance transactions. They are both a means of payment.
A bank guarantee is a guarantee, (BG), by the issuing bank to pay the beneficiary should they suffer a loss or non-payment. It is a security for a payment.
If a standby letter of credit is used for monetising or credit lining then it has the same status as a bank guarantee. The standby letter of credit becomes a guarantee of payment.
Credit Lining and Monetisation – Is there a difference?
A bank guarantee and a standby letter as advised can both be monetised. In effect the lender or bank have given the instrument a monetary value. No physical cash is handed over.
The monetisation process is a loan to value, (LTV), offered by the bank to the beneficiary. For example, a bank guaranty for Euros 10 Million is monetised with an LTV of 90%. The bank has given the bank guarantee a monetary value of Euros 9 million
Once the process of monetising is completed the beneficiary can be offered a line of credit which in this example is Euros 9 Million. The beneficiary may wish to open a Documentary Letter of Credit, or it may just be an outright loan. The make up of the line of credit will be in the agreement between the bank and the beneficiary.
The process of monetisation comes first then the lender agrees the details of a line of credit with the beneficiary.