SURETY

Bonds can be provided mostly by insurance companies.  Banks will only provide unconditional on-demand guarantees that are independent instruments and do not provide any protection of the underlying contract conditions. 

The insurance market prefers to provide guarantee bonds that are conditional in nature and relate directly to the underlying contractual obligations. This type of instrument is ‘off balance sheet’ and will not impact or reduce your working capital facilities. An insurer will usually take security by way of a counter indemnity from the company (or group) and will not charge an arrangement or non-utilization fee. Bond premium is paid solely on the individual bond requirement

Not all bond providers are the same and each can have a different opinion when it comes to analyzing credit risk, pricing bonds, or reviewing bond wordings. Marsh has access to the entire  surety market and can ensure that the most appropriate surety companies are approached for your bond or bonds.

Our team of surety experts provides a range of services, from arranging bond capacity, to providing advice on bond and indemnity wordings.

Historically, there was little appetite from surety underwriters to provide a guarantee replacing letters of credit and an unwillingness by insurers to accept/consider an alternative to a Letter of Credit (LoC).

Marsh’s Surety Practice has worked closely with the international surety market to develop appetite for this product and create suitable wordings. Many of the sureties are now comfortable in issuing a full on-demand guarantee, which provides the beneficiary of the guarantee a like-for-like payment mechanism to a letter of credit.

We are finding that more insurers are now happy to accept a surety guarantee as a LoC replacement. One major factor that has influenced this is the downgrading of several banks, some of which now fall under the minimum credit rating criteria requirements set by the beneficiaries . In contrast, most of the sureties have a Standard and Poor’s rating of at least AA-.

Advantages of Replacing LoCs with a Surety Bond

• Free up banking lines: the stark contrast with a surety bond is that the capacity provided by the sureties does not impact on a group’s banking facility, thus freeing up working capital for core business activities.
• Possibility of obtaining more competitive pricing for bonds: the cost of capital for sureties is different to that of banks and often allows the surety market to offer very competitive pricing, where appropriate.
• Access additional capacity: additional capacity is often available for clients to utilize for other guarantee requirements they may have; there would be no cost implications of having the additional capacity available. Costs are based purely on utilization.