Monetisation
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How to Monetise a Bank Guarantee
If a company wishes to lease a bank guarantee for monetisation, there is only one bank guarantee that can be used for this transaction. The Demand Bank Guarantee. This guarantee carries specific wording that relates solely to monetisation.
It is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758) and is payable on first demand. The demand bank guarantee gives 100% protection to the lender.
When a beneficiary receives a demand bank guarantee on their account they are considered to own this instrument. Together with their business plan and offering the bank guarantee as security the beneficiary can approach their bank and apply for loans and lines of credit. In these circumstances loans and lines of credit are alluded to as Credit Guarantee Facilities.
How to Monetise a Standby Letter of Credit
As already advised a standby letter of credit underpins trade finance transactions. However, a standby letter of credit is a flexible instrument and can also be used for monetisation purposes.
When a standby letter of credit is utilised for monetisation it will contain exactly the same verbiage as a demand bank guarantee. As a result, the standby letter of credit will now be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). The standby letter of credit will be payable on first demand.
For more information URDG 758 please go Menu, see Format and look under ICC Uniform Rules for Demand Guarantees, (URDG 758).
Credit Lining and Monetising
A popular question is, “Is there a difference between credit lining and monetising?” The answer is yes, though a subtle one.
Monetising
When a beneficiary receives a demand bank guarantee they will request a loan or a line of credit from their bank. The bank will have to monetise the bank guarantee. They don’t just hand over cash they give the instrument a monetary value.
The bank will offer the beneficiary a loan to value or LTV against the bank guarantee. For example, the bank may offer a 90% LTV against the face value of the bank guarantee. Therefore, if the bank guarantee has a face value of Euros 10 Million they will monetise the instrument at Euros 9 Million.
Credit Lining
The bank guarantee has now got a monetised value of Euros 9 Million. The bank and the beneficiary will agree the terms of the credit line. This can for example include cash drawdowns, trade finance lines, guarantee lines or a mixture of all three. It will depend on the business plan.
Therefore, in answer to the question monetising first gives the instrument a monetary value. Once the value has been agreed then secondly the credit line can be agreed.
Different Bank Instruments and Monetising
A bank guarantee has a different role to play than a standby letter of credit or a documentary letter of credit.
A bank guarantee (BG), is as the name suggests a security for a payment. A standby letter of credit (SBLC), or a documentary Letter of Credit (DLC), underpin trade finance transactions and are therefore a means of payment.
Whilst a documentary letter of credit is rarely monetised a standby letter of credit can be monetised. Under these circumstances a standby letter of credit is no longer a means of payment. It has become a security for payment.