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How to secure trade related promises between two parties?

How to secure trade related promises between two parties

What is Surety?

The broad definition of surety is a legally binding contractual agreement between three parties: the Surety Company (Guarantor), the customer and a third party also known as the bond beneficiary.

Traditionally, surety bonds are used to cover risky markets but the product is today one of the most efficient solutions to cover trade relations between two parties or legal obligations. Hence, this solution can apply to different scenario in order to regulate the relationship between the customer and the beneficiary. As a result, if the customer fails to execute the obligation, the bond beneficiary will be entitled to claim the money from the Surety Company.

The nature of the obligations covered determines which category the bond falls under:

  • Commercial bonds ensure the customers will do their job according to licensing laws or industries regulation
  • Contract bonds guarantee project execution on time and according to the requirement from the project owner (beneficiary)

Having surety solutions in hands is key since the underlying contract will sometimes become effective once the surety bonds are issued. No bond issued could question the entire transaction.

Prior to the bond issuance, the Surety Company must review different underwriting information to determine if the customer is eligible. The credit risk is, without any doubt, the most important criteria the surety company is assessing. The long tenor and the non-cancellable nature of the product led to a stringent review of the customer’s credit worthiness, together with the technical capabilities of the client and the availability of risk mitigants.

Holger Schaefer (fourth from left), Head of Region, Euler Hermes Asia Pacific, at a regional surety workshop recently held in Hong Kong

Holger Schaefer (fourth from left), Head of Region, Euler Hermes Asia Pacific, at a regional surety workshop recently held in Hong Kong

What are the benefits for customers to buy surety, especially contract bonds?

Many businesses use surety bonds and guarantees to support and protect the contractual obligations they have entered into with customers, suppliers and partners. These solutions are flexible and can be adjusted for use on major projects or in different trade sectors. A surety bond or guarantee can safeguard our customers’ working capital so that they are able to grow their business without financial pressure. The regulations and business practices that apply to surety bonds can vary between countries, so it is important to get expert advice when using them, especially when entering a new market for the first time.

Key benefits include:

  1. Financial Stability: our rating which is easing the Euler Hermes direct acceptance by the beneficiary and therefore is removing the necessity to issue the bond locally. With our S&P AA rating, the beneficiary will receive a bond from a solid and reliable reference, which is useful for long-term projects.
  1. Extensive Global Network: Our extensive global network and corporate strength stands behind our surety bonds and guarantees to reassure our customers’ business contacts that their interests are protected. With a global surety team of over 150, Euler Hermes is uniquely capable of providing true integrated international bond programs, allowing for central management and a single contact for operations in multiple countries. The company’s worldwide presence and proprietary global market information allows it to accurately calculate risks to proactively support customers. We also have the ability to issue the bond through our external fronting partners (more than 40) which are mainly first class international banks.
  1. New Business Opportunities: Using surety bonds can open up opportunities in the public sector and developing markets where the risks are different from standard trading deals. The expert teams at Euler Hermes can provide advice and guidance on the use of surety bonds and guarantees in markets around the world so that our customers’ decisions can be made with full understanding.
  1. Added Peace of Mind: Our customers will be able to tender for a contract knowing that credit lines with their banks are not affected. This means that borrowing facilities and working capital are safeguarded enabling our customers to plan ahead with confidence in the knowledge that they have the capability to carry out the contract and provide the bond – a distinct advantage over a competitor who does not have this facility. Essentially, the surety bonds are a financing alternative to bank bonds that allow companies to free up liquidity and enjoy more room for maneuver in financing and growing their business.

Does it mean that we are competing with banks?

No. Our customers are usually working with numerous banks or surety companies, since the sweet spots may change from a financial institution to another.

Sometimes we are even actively collaborating with banks. Upon our common clients instructions, we have to team up with bank(s) to syndicate a large bond amount issuance.  Also, using a bank for a fronting scheme requires strong relationship with our bank partners.

What kind of projects/sectors are you covering?

Primarily we are covering the infrastructure, oil and gas, as well as the manufacturing sectors. However, the sector is one thing but the first underwriting criteria we are looking at is the client credit quality. Euler Hermes in APAC has a long-term strategy on surety and as a result, we have no interest to pursue low quality opportunity.

Has digitalization benefited your marketing of surety?

Reflecting Euler Hermes’ digital focus and business partner collaboration strategy, our APAC team is in the midst of developing a digital solution – we are working with partners to figure out how, when and where these solutions could be adapted to the markets specifics and implemented.

Our digitalization investments in other regions are paying off and with an adapted strategy and timeline for APAC, we aim to be perceived as a key digital player within the next 5 years.

Global Banking & Finance Review


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