QUESTION: WHAT IS CREDIT ENHANCEMENT?
Answer: Credit Enhancement is a method whereby a company attempts to improve its debt or credit worthiness. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee. Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates.
QUESTION: WHAT PURPOSE DOES A LEASED INSTRUMENT, WHICH IS NOT CALLABLE, SERVE?
Answer: You are leasing an instrument on the basis that the instrument is not called, even though it legally could be called, but you lease it for your own credit enhancement. You can not seriously expect that a 4% leased instrument will actually be available to pay for your eventual debts of up to the face value of the leased instrument.
QUESTION: HOW IS CREDIT ENHANCEMENT APPLIED?
Answer: Credit enhancement is used to obtain better terms for an outstanding debt. Securitization, posting collateral and obtaining external credit enhancement such as a letter of credit are some basic forms of credit enhancement. Firms may also increase cash reserves or take other internal measures to uphold superior solvency ratios.
QUESTION: WHAT IS A CREDIT ENHANCEMENT INSTRUMENT?
Answer: A leased instrument that can be a powerful business tool when used for enhancement purposes, to enhance your credit position with your bankers (or at your supplier’s bank), or to improve your balance sheet. All the securities should be callable, assignable, fully transferable and lien capable. Only a solid financial standing of the applicant/client and a proper legal structure can build the required framework to achieve this.
QUESTION: WILL THE PROVIDER PAY FOR MAY DEBTS IF THE INSTRUMENT IS CALLED?
Answer: Think about it, the majority of bank instruments are for an amount of USD/EURO 100M and more, and are owned by the most affluent individuals in the world. Do you really think they would allow you to use it as collateral for risky transactions, all for just a 5-10% fee per year? No, that would be ignorant, and not worth the risk. Any transaction is structured in the way that YOU ORDER A SWIFT and the provider arranges that SWIFT MESSAGE as ordered by you. You will end up having to pay for your debts yourself.
QUESTION: IT IS MY UNDERSTANDING THAT BANKS DON’T LIKE LEASED BGS. IS THAT THE CASE AND WHY? WHAT MAKES YOURS ACCEPTABLE AS COLLATERAL?
Answer: We do not provide any sort of education on how you should use Bank Guarantees and SBLCs for your credit enhancement. On this subject, please consult with your own banker. Your bank will have to provide you with a credit line and agree to fund your project or business once a Bank Guarantee or Standby Letter of Credit has been advised to your receiving account via SWIFT MT799 andMT760, issued by a major world bank.