SBLC/BG Leasing: Fact or Fiction?

3 replies [Last post]
FrankQorez
Offline
Joined: 05/01/2010
Printer-friendly versionSend by emailPDF version

This has been discussed in many posts, however I wanted to invite the brightest and most experienced minds on this subject to comment:

 

We see many offers for so called "Leased SBLC/BG" in the internet broker world. The provider usually has no verifiable credentials. The client is offered an SBLC/BG in return for a fee (8-15% per annum). 

 

The obvious question arises: What security does the provider have if the SBLC/BG is called (drawn down). Obviously the Provider would suffer a loss of the SBLC/BG amount (minus the fee of 8-15%).

 

So at first sight the concept of "Leased SBLC/BG" does not make sense.

 

\However, I just want to explore the following possibilities:

 

(1) Can any banker/financial professional out there think of any plausible explanation (other than these Providers are purely naive or fraudulent)

 

(2) I am familiar with Controlled Documentary Letters of Credit (where the applicant controls one of the documents needed to draw against the LC). Could the case of Leased SBLC/BG be anything similar?

 

(3) Could there be some hidden "control/discrepency mechanism" through which the issuer of these SBLC/BG can protect his exposure to the risk of a draw down

 

(4) Has any banker ever heard of the term SBLC Leasing?

 

(5) Do banks have a mechanism (such as ICBPO) by which the advising bank can guarantee payment to issuing bank where this payment is to come from loan against the SBLC/BG

 

Please, lets us allow experienced professionals  to answer. (We allknow the viewsof SBLC/BG "PROVIDERS").

 

Thanks 

 

sapphirecapital's picture
sapphirecapital
Offline
Joined: 03/07/2010
my personal take

a. leasing of a financial instrument is more like a non-standard repo, since the instrument can not be replaced by a new one.

b. since the instrument which is "leased" has to be given back and can not be encumbered it is defacto only of use to show a portfolio

c. since a bank or a lender will verify the availability of assets as collateral and these are not, they have no use

d. even if they have no use the delivery could have been made and so the user is obliged to pay the fee

e. if the presentation to the lender is not stating the facts it is a misrepresentation and more likely a fraud.

f.  sblc and bg's offered in these are usually either non-existent or empty, meaning of no value since there is no possible call on them.

g. a controlled dlc is something different

h. the control is not hidden it comes with the advise.

i. since there is no loan, no, otherwise it would be an escrow situation, which some banks in europe perform for a fee but that only works with real BG's which are issued in detail for securing performance of a loan and has call procedures. Used in M&A etc.

j. there are alternative offers in the market using CD's from an offshore entity, beside the tax implications they have similar problems

k. there are scenarios in debt placements which can be used with such instruments as a non-recourse structure but most people think thats to complicated.

FrankQorez
Offline
Joined: 05/01/2010
....BUT HOW TO KNOW ITS LEASED?...

 Thanks Saphire Capital for your input. However, with reference to your comments....

  • here is a standard text of a BG http://www.assurancefin.com/docs/RBS-UK-BG-DRAFT.pdf 
  • How is a "leased" BG text different from the above?
  • What does it mean to "give a leased instrument back unencumbered"? As far as i know, an irrevocable BG can only expire, or be cancelled early by the beneficiary.
  • How does the bank (which is considering loaning against this BG) verify assets under the BG? In other words how would the leding bank know whether its a normal or leased BG? 
  • I GUESS TO SUM IT UP, IF YOU WERE PRESENTED 2 BG'S FROM HSBC, HOW WOULD YOU DETERMINE WHICH IS "LEASED" AND THEREFORE "USELESS AS COLLATERAL"
sapphirecapital's picture
sapphirecapital
Offline
Joined: 03/07/2010
reply

your draft has multiple problems and in this general form is not used to support commercial transactions but in the syndication environment following the arrangements of a dark collateral pool.

a leased instrument will either state its restriction in the advise or in the text and usually the beneficiary will have to net the payment obligation which requires further bank commitment.

instruments which are clean, straight payment type and transferable, meaning bond like, need to be returned even after expiration, there is a standard procedure for such

assets under the instrument are in the trace reference with under money laundering provisions of almost all jurisdictions have to be implemented, the standard reference is under an IBAN verification scheme, others are file related refering to closed escrow arrangements in depositary institutions.

the lending bank will always know from the transfer  that there is a restriction and almost always there is a  clause in the lending agreement that the borrower inform the lender about the restriction, if such is activly misrepresented it can be fraud, inactively it is at least a breach of contract.

In addition the referenced guarantee format received in a non-institutional account at HSBC will call compliance on the plan a.s.a.p., if ac. closure is the only thing happening the receiving beneficiary should be happy; in order to have these handled you need an acc clearance, not just a checking account.

//
//