Asian companies are freeing up much-needed capital by switching to surety bonds from bank guarantees, according to insurance broker and risk adviser Marsh.
The move is in response to banks withdrawing credit lines from some clients who they no longer feel comfortable lending to. When banks are not pulling the lines, they are increasing the cost of credit to customers in Asia.
Where they have the possibility of withdrawing from long-term financing commitments, banks are now exercising their right to do so. Many banks have a material adverse change clause in their financing agreements that gives them an option out if circumstances alter dramatically.
“The credit crisis is forcing companies to come up with alternative capital accessibility strategies, ensuring their banking lines remain as open as possible,” says Richard Green, head of Marsh’s trade credit practice for Asia. “Most businesses don’t realise that bank guarantees actually use up a company’s banking facility. Switching to surety bonds with an insurer can provide the same level of protection without affecting their banking facility,” he adds.
Surety bonds are most commonly associated with construction projects, but can be used to mitigate the risk of non-completion or delivery of any service, as spelled out in an agreement or contract. Green says they offer a cost-effective alternative to bank guarantees, with the added advantage of not being secured against a company's banking facilities.
“Surety bonds have the backing of stable, well-capitalised specialist underwriters. Competition is healthy at the moment in Asia, which means businesses can obtain surety bonds at favourable rates,” he adds.
The bonds are typically 5% to 10% of the contract price and are underwritten by a local or international reputable bank or insurer. In the event of a claim where the terms of the contract are not met, the bond kicks in by providing monetary compensation for any losses incurred or reimburses another contractor to complete the job, depending on the term of the contract.
Marsh is a global insurance broker and risk advisor with 26,000 employees. It provides advice and transactional capabilities to clients in over 100 countries. It is a unit of Marsh & McLennan Companies, a global professional services firm with more than 55,000 employees and annual revenue exceeding $11 billion.