The Startling Truth About Credit Enhancements
The terms Credit Enhancement, Collateral Enhancement, and Credit Enhancement Programs have been abused very badly in the collateral marketplace. But, they shouldn’t be. For these methods of financing have been known since the Phoenician Traders at the beginning of the last millennium BC. Or better yet, since the existence of a medium using money as an intermediary between products.
You see, when a borrower is unable to offer sufficient collateral to cover a loan or provide an assurance that the loan will be repaid in full, he may be required to seek a form of "insurance," a loan back-up or support, to cover the loan in the event of default. Simply stated, a Credit Enhancement or Collateral Enhancement is a form of collateralization. And the specific options offered by substantial financiers or underwriters based upon the credit rating of the borrower are known as Credit Enhancement Programs
Credit enhancements have been given a wide variety of names such as indemnification documents, collateral bonds, credit boost up, surety bonds, collateral assurance documents, etc. While each type has its own legal ramifications, they all have the pay-on-default feature. That means in the event the borrower defaults on his loan, the underwriter or financier will have to make it good… repay the loan.
The Apparent Veil Of Secrecy In The Marketplace
Oftentimes you’ll hear people making references to "major worldwide banking institutions" or "better known insurance companies rated minimum A, or best AAA" as the preferred source of funds to underwrite these transactions. Actually, it’s not the size that matters. It’s the financial condition of the underwriter. An acceptable collateral should be written by a substantial institution (banks, insurance companies, trust companies, private entities etc.) whose credit is good and world known.
Today, because the discussion of collateral or credit enhancement is often associated with "offshore" (known for its secrecy), the marketplace has created a huge aura of secrecy. In fact, until now, a veil of secrecy has shrouded the world of collateral enhancements. Information as simple as what these documents are and how they’re used have been known only to a few. But, I hope this site has given you some grip on them.
As you can see, there is so MUCH to learn before you can venture into this marketplace successfully.
Loans on a Worldwide level are available against :
Any Type of Security - Any Type of Government Issued Note or Bond -
Any Bank Instrument - Any Currency Bills or Notes -
Virtually Any Form of Paper that can be Bought, Sold, or Traded.
Letter of intent to Guarantee
Some Examples Are:
US Currency (any denomination)
Foreign Currency (any denomination)
US Zero Coupons
Government Medium Term Notes (MTNs)
Government Bonds, Coupons, or Certificates
German Bearer Bonds
Stocks or Stock Blocks
Government Promissory Notes
Bank Promissory Notes
Corporate Bonds, MTNs, and Promissory Notes
Certificate of Deposit (CD)
American Depository Receipts (ADRs)
Bank Guarantee (BG)
Letters of Credit (SBLC, ILC, LC, Pay Order)
Private Debt - Mortgages, Loans, Liens and Encumbrances
All instruments pledged must meet the following criteria to qualify as acceptable security.
a) must have been issued from a top 100 bank or institution,
b) must be transferable and negotiable,
c) must be bank-to-bank verifiable,
d) must be of non-criminal origin,
e) must be owned free and clear with no encumbrances,
f) must be fully legible with no alterations or editions,
g) actual instruments must be produced at closing and given to the escrow attorney effecting closing.
- Lenders require that the collateral for the loan exists in the form of negotiable instruments that are rated and traded in the secondary markets and that can be easily liquidated in the United States or other major secondary markets in Europe and Asia.
- Funding sources consist of Private lenders, trusts, banks, Private placements and Syndicated loans. We arrange all funds regardless of whether a project is involved. Funds borrowed must first be secured by acceptable collateral offered to the lender ( meaning principal amount and interest should be secured through the pledging of “A” rated Commercial Papers, Bonds, Notes, bank or Insurance guarantee, etc..
A Letter of Intent to Request Funding: this is a simple letter from the borrower, signed, dated, with borrower's corporate seal, and notarized, stating the amount of funds to be borrowed, the required interest rate and for the required period how many years.
- Usually the instrument will be screened to determine acceptability. Your Guarantee will be checked by contacting the bank officers for full verification. Remember the necessity of bank-to-bank SWIFT/Key-Tested Telex secure verification.
Does your bank request a "proof of funds" from the Lender before they will issue the guarantee or any kind of letter of intent to guarantee? If so, the deal is over and you need to find a new bank. These institutions are attempting to use other peoples funds to create guarantees, placing all risk on our lenders. You should be careful of any and all "proof of funds" deals.
Usually after a copy of the instrument was obtained and verified with the bank's officials, a proof of funds will be done on a bank-to-bank basis. At the right time, the guarantor bank will be provided with the full swift and KTT coordinates and there will be a mutual secure confirmation of the funds and the guarantee.
After the signing of the contract to fund by the borrower, this process will be repeated when the funds are transferred to the borrower's account, and the guarantee is transferred to the lending bank's account.
The contract Offer to Fund will be issued if it's a legitimate instrument verifiable by Swift. If this is acceptable to the borrower, a bank-to-bank funding will take place, using the same secure method used to confirm the guarantee and the funds earlier.