"Applied Credit Enhancement in the Commercial Sector"

SECTION 3 - You cannot expect a professional service without a financial commitment


If a valid financial instrument is generated on the basis of Securities Borrowing and Lending, to create a Bank Guarantee or the SBLC for a client, there are no payments for the Borrowing and Lending Fee in advance what-so-ever, but the procedure involves the payment of a commitment fee / call option. Depending upon the financial strength of the borrower, this small fee is advanced by the Facilitator for the borrower, or if the borrower is not fully qualified, he will have to place the Commitment Fee to start the transaction.


Reserving the back-up Security through a Call Option


Payment of this commitment is necessary for two reasons: Once the Securities that will underpin the transaction have been selected and the Lender or investor must purchase the instrument to generate the basis on which the Bank Guarantee or Standby Letter of Credit is emitted for the Borrower.


On the Secondary Market, which is the main security trading place with the highest turnover, a Call Option is placed for a specific high rated debt instrument which an investor is going to buy and lend to your transaction. Your Commitment Fee respectively the Call Option secures the right for the Investor to purchase the instrument within 20 days at a specific purchase price. To hedge against market fluctuations the Call Option is placed and this is the reason why a client will have to financially commit himself to the transaction. Obviously, you cannot access a professional service without a firm financial commitment.


If the Lender purchases the Securities for a client’s transaction and the client does not perform, respectively the client’s bank does not follow up with the required and agreed upon conditional payment instrument to account for the Borrowing and Lending Fees, this could create a significant loss for the Lender.


When both parties sign the Securities Borrowing and Lending Agreement, the client has 20 days to send, as instructed by the Lender, the necessary payment guarantee, which is conditional to the delivery of the agreed upon instrument and its verification at the receiving bank. Only after receipt and verification of the instrument by the Borrower’s bank, payment will be effected and released to the securities Lender.


With the payment of the call option, the purchase price is fixed during this 20 day time period in which a client has to arrange one of the 4 conditional payment instruments that he and his bank prefer to use.


The Securities that will be backing up a client’s transaction are trading in the secondary market and their price changes minute by minute. The price of securities fluctuates daily. With the call option placed by the Lender and even if the publicly listed price for these securities goes up or down, the price is fixed for a Borrower’s transaction.


The Securities backing up a Borrower’s transaction are already issued, on the market, publicly listed and traded. But they are not yet in the Lender’s Securities account. MTNs and Bonds used for a Securities Borrowing and Lending transaction are issued by Top Rated Banks and therefore the Securities are top rated.


But since the Securities are not in a Lender's own portfolio, the Lender will have to purchase the instruments to enable and back up the emission and to generate a specific Bank Guarantee of Standby Letter of Credit as agreed between the Lender, the Borrower and the Borrower’s bank.


The financial assets used together with the applied procedure represent probably the only way to access a Bank Guarantee or SBLC from a third party, to serve as valid collateral during the agreed period of time, without the Borrower being required to deposit equal value (or more) in a bank.


There are many borrowers searching the financial market place believing they can access any professional service, or a valid financial service or Bank Guarantee service without any money up front. It is a fact – there is simply no free ride available.


No airline will fly you around, even when they might be desperate for business if you do not first buy and pay for the ticket. And you have to be an acceptable passenger in the first place.


Ask consulting firms like IBM Global Services, KPMG, Accenture, Ernst & Young, Price Waterhouse Coopers, Deloitte, Boston Consulting or McKinsey. You will never get a professional service without your retainer funds on deposit with them. You will also not be served by a qualified lawyer or accountant without having some earnest money from you on their account first. On top of all this, you will have to be an acceptable client to receive a bank guarantee service.


Are you qualified so that any third party will be prepared to enter into a risk of millions of dollars or Euros for you? No one will ever lend you a valid financial instrument if you are not qualified and be able to account for an eventual financial risk you might create on the basis of the guarantee instrument. “Did you ever think about what happens in case you default on your commitments, and the instrument backing up your loan or transaction is being called by your lender?” NO BANK will take the risk on a transaction for a customer, unless the bank is covered by hard cash, tangible assets or investments you have in the bank.


With a Business Support Contract, there is even the possibility for a qualified client to have an absolutely no front fee transaction. For this scenario, your last year’s revenues have to be equal or higher than the instrument value that you seek. In that case, you do not have to pay anything in advance since the Facilitator advances the fees for the Call Option fee on your behalf: But only if you are qualified accordingly.


Then this transaction becomes completely free of any advance payments and the delivery of the financial instrument is on the basis of payment against delivery and verification, if the BORROWER’s own company will receive the BG or SBLC and if it is of substance, with an active commercial business, audited accounts and annual revenues in the past fiscal year, equal to the face value (or more) of the guarantee instrument that is requested.


Only once it can be established that you can be considered qualified for the service, the issue of eventually required deposit or a commitment fee may become an issue. All banks charge fees to create and transmit the Bank Guarantee to a Funder. No bank will do that for free! Using the Business Support Contract you are dealing with a Facilitator who is prepared to take such risks. You can find terms and conditions of the Business Support Contract The Facilitator of a transaction takes the risk and advances fund on your behalf. If the bank is not paid the transaction fee, no Bank Guarantee or Standby Letter of Credit will ever be sent. If you are not prepared to engage with your financial commitment to the transaction, you simply will not get a valid service from anybody.


180 day deferred payment option


The Unconditional Promissory Note endorsed by receiving bank. In the Securities Borrowing and Lending transaction you even have the possibility to pay for Borrowing Fee on a deferred payment basis. Payment can be made with an acceptable Promissory Note endorsed by the client’s bank. In that case, you have up to 180 days (depending upon your bank rating) opposed to other payment methods to pay for the borrowing and lending fees.


These other payment modes are a Conditional Irrevocable Pay Order (ICPO) endorsed by borrower’s bank, a Conditional Payment via SWIFT MT103 or a Conditional Documentary Credit to be sent by SWIFT MT 700- All payment options have to be acceptable and approved by the collateral lender



So this is the way to move forward


After you have the basic OK from your receiving bank:


  1. You order a bank instrument (SBLC or BG) for Euro 10 million up to Euro 500 million backed by highly rated securities.
  2. The Provider (a Securities Dealer) will buy Securities on the Secondary Market for your transaction in the respective value on behalf of the investor who will pay and own the securities.
  3. On the back of these Securities the investor causes to issue a fully cash backed Bank Guarantee or a Standby Letter of Credit and sends it to your bank for your beneficial use.
  4. Your bank pays only the service fee for the use of the instrument for one year.
  5. After 350 days your bank guarantees to return the instrument unencumbered or you opt to renew the service, which can be for up to 4 more years.

Section 1 - Probably the only way to get access to valid Credit Enhancement Collateral

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Section 2 - You have a bank willing to extend a Loan to you?

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Section 4 - The Essentials when Borrowing and Lending Securities

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Section 5 - Securities Lending from a Securities Owner’s Perspective

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