"Applied Credit Enhancement in the Commercial Sector"
SECTION 4 - The Essentials when Borrowing and Lending Securities
Once you have negotiated a credit line with your bank, the collateral you may need to back up the credit line can be arranged on the basis of a Securities Borrowing and Lending Agreement. On behalf of an investor, a securities dealer will buy, hold and lend the unconditional use of the securities to you in the form of an SBLC or Bank Guarantee to serve as your cash collateral for an agreed period of time.
The different Steps of such a transaction
FIRST STEP: A client completes and submits the Business Support Contract
SECOND STEP: The completed contract and submission is assessed by the Intake Officer to determine if a client can be qualified to receive this Prime Bank Collateral Service.
THIRD STEP: If it can be determined that a transaction can be accepted, the invoice for the commitment or call option fee is issued and it has to be paid directly into the Facilitator’s account.
A Call Option is required to be placed to secure the right for the Investor or Lender to buy the securities at a fixed price within the next 20 days. The Investor buying the securities for a specific transaction does not own the securities at that stage. So placing a Call Option is needed in order to issue the Securities Borrowing and Lending Agreement and for the Investor/Lender to reserve the right to purchase the chosen securities at a certain date and at a certain price. Payment is into the Facilitator’s own account. An easy alternative option is however available.
FORTH STEP: If a Borrower proves to be of substance, the Facilitator is prepared to advance this on behalf of a client. Receipt of commitment or call option fee automatically causes acceptance to the BSC by the Facilitator. You may need to place the Euro 30,000 commitment or call option fee if you are not fully qualified and
- if your business cannot evidence to be of substance and is well established since years
- if your company does not evidence an established active commercial or financial business and you do not have audited accounts
- if your audited accounts and annual revenues for the past fiscal years, do not equal to the face value (or more) of the guarantee instrument that is requested
- if audit was not performed or is endorsed by a major and internationally recognized firm.
FIFTH STEP: Once a client has committed himself to the transaction, the Facilitator or his securities dealer starts negotiations with standby investors to buy specific securities for this Securities Borrowing and Lending transaction.
SIXTH STEP: Call option fee is placed on the Securities market reserving these specific securities to back up your transaction for the next 20 days. Once the securities have been selected, the Call Option fee is placed on the securities market and the Securities Borrowing and Lending Agreement can be issued.
SEVENTH STEP: The Securities Borrowing and Lending Agreement is issued and sent to the borrower client together with all information to clearly identify the securities that will build the basis on which the BG or SBLC will be issued for the client.
At this stage, the client will then have all details of these securities and can request Bloomberg Printout, Security Card of the Stock Exchange market where the instrument is quoted, Prospectus of the Issuing Program of the Bank to permit the designated Borrower’s Bank Officer to check the availability on Euroclear, Clearstream or the Bloomberg systems.
EIGHTH STEP: Within 20 days, client’s bank sends the conditional payment instrument to pay for the borrowing and lending fees
If the client’s bank issues or endorses any of the 4 conditional payment methods to pay for the Borrowing and Lending fees, the I C P O, Promissory Note, conditional SWIFT MT103, conditional DLC SWIFT MT 700, and provides a confirmation for the safe return of the collateral after the agreed term, then we can guarantee to deliver.
NINETH STEP: Issuing and Receiving Bank communicate to fine tune the SWIFT MT760 delivery of the instrument and perform their own due diligence on the parties involved.
TENTH STEP: Receiving Bank consents to return the SBLC/BG 15 days prior maturity The receiving bank must undertake the irrevocable commitment to return the instrument unencumbered, free and clear of any debts or claims 15 days prior maturity.
ELEVENTH STEP: In this Securities Borrowing and Lending transaction, the issuing bank sends the agreed SBLC or BG via SWIFT MT 760 to the receiving bank in line with the Securities Borrowing and Lending Agreement.
THE TWELVTH STEP The Receiving Bank verifies the SWIFT MT 760 SBLC or BG instrument and releases payment for the borrowing and lending fees as to the Securities Borrowing and Lending Agreement.
THE THIRTEENTH STEP: With the instrument in his account, the client triggers cash from his credit line and starts his project. He has the unrestricted use of the collateral as to the Securities and Borrowing Agreement for the coming 350 days.
THE FORTEENTH STEP: Fifteen days prior maturity, the client is given the opportunity to extend the service for another year. If the client does not need the instrument any longer, the client’s bank returns the SBLC/BG after 350 days.
Basic and Essential Requirements
- Consent to any of the 4 conditional payment options. You will have to get this support from any of your banks to pay for the borrowing and lending fee and issue or endorse any of the payment instruments to pay conditionally for the lending fee..
- Your receiving bank will have to be in agreement with the verbiage of the Standby Letter of Credit, or a Bank Guarantee as available to serve as your collateral for the agreed period of time.
For selective clients, there may be a Solution for any of these issues:
If you may not want to disclose full details of this transaction to your receiving bank, if you do not want to fully disclose that your collateral is a result from a borrowing and lending transaction, if you do not want to disclose that the guarantee instrument is to be returned 15 days prior maturity, if you require a SWIFT MT799 Pre-Advice to get your transaction started.
Back to back transactions
Since it is fully cash backed, divisible and assignable, you can use this instrument also in a back to back transaction to issue your own instruments on the back of our instrument. This can leverage your own financial possibilities and overcome “certain contractual issues”.
The instrument can also be sent to a monetizer, but again, the monetizer ‘s receiving bank will have to endorse all the contractual agreements.
The Alternative: A Back to Back transaction. You have the instrument sent to your own bank and on the back of it, you have your own instrument issued. The instrument issued to you is fresh cut, cash backed, divisible and transferable to enable this option or a back to back transaction whereby the instrument is sent to your own bank and your bank, on the back of the instrument, issues its own instrument to your trader, monetizer or supplier.
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