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How to secure trade related promises between two parties?

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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.

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Sterling rises above $1.37 for first time since 2018; UK inflation rises

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Sterling rises above $1.37 for first time since 2018; UK inflation rises 1

By Elizabeth Howcroft

LONDON (Reuters) – A combination of heightened risk appetite in global markets and UK-specific optimism lifted the pound on Wednesday, as it strengthened to its highest in nearly three years against the dollar and five-month highs against the euro.

The dollar weakened against major currencies for the third straight session, helped by U.S. Treasury Secretary nominee Janet Yellen’s urging lawmakers to “act big” on spending and worry about debt later.

The pound rose above $1.37, hitting $1.3720 — its highest since May 2018 — at 1045 GMT. By 1136 GMT it had eased some gains and changed hands at $1.3687, up 0.4% on the day and up 0.2% so far this year.

Versus the euro, the pound hit a five-month high of 88.38 pence per euro, before easing to 88.51 at 1137 GMT, up around 0.5% on the day.

The pound’s recent strengthening can be attributed in part to relief among investors that the impact of Brexit has not caused the chaos some feared, as well as a lessening of negative rates expectations, said Neil Jones, head of FX sales at Mizuho.

“Going into early 2021, there was a bearish sentiment building into the pound on the Brexit deal, in terms of maybe it had a limited reach, and then secondly an expectation of negative rates and so to some extent the market has been cutting down on sterling shorts because neither of those things have been quite so apparent as they were,” he said.

Bank of England Governor Andrew Bailey said last week that there were “lots of issues” with cutting interest rates below zero – a comment which caused sterling to jump.

The UK’s progress in rolling out vaccines is also seen as a positive for investors, Jones said.

Currently, the United Kingdom has vaccinated 4.27 million people with a first dose of the vaccine, among the best in the world per head of population.

“Further progress in vaccinations (a pick-up in the daily rate) by the time the BoE MPC meeting takes place on 4th February may prove enough to hold off on any additional monetary easing,” wrote Derek Halpenny, head of research for global markets at MUFG.

Inflation data for December showed that prices in the UK picked up by more than expected in December, to a 0.6% annual rate.0.6

Inflation has been below the Bank of England’s 2% target since mid-2019 and the COVID-19 pandemic pushed it close to zero as the economy tanked.

(Graphic: CFTC: https://fingfx.thomsonreuters.com/gfx/mkt/oakpeyayxpr/CFTC.png)

(Reporting by Elizabeth Howcroft, editing by Larry King)

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Euro sinks amid broader risk rally against dollar

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Euro sinks amid broader risk rally against dollar 2

By Ritvik Carvalho

LONDON (Reuters) – The euro struggled to join a broader risk rally against the dollar on Wednesday as analysts said the risk of extended lockdowns in Europe to combat the spread of COVID-19 and the continent’s lag in a vaccine rollout were weighing on the currency.

Down 0.1% against the dollar at $1.2117 by 1130 GMT, Europe’s shared currency had only the safe-haven Swiss franc and Sweden’s crown for company in resisting a broad rally against the greenback by the G-10 group of currencies.

“We’re getting more headlines that the current lockdowns will be extended further, which could mean that the euro zone would be flirting with a double-dip recession before long,” said Valentin Marinov, head of G10 FX research at Credit Agricole, noting Europe’s lag in rolling out a coronavirus vaccine compared to the United States and Britain.

“So all of that plays into the story that tomorrow’s ECB meeting, while uneventful in terms of policy announcements, could convey a relatively dovish message to the market. On top of that, President Lagarde could once again jawbone the euro, so the euro is kind of lagging behind.”

Marinov also noted price action in the pound, which hit $1.3720 – a 2-1/2-year high – and 88.38 pence – its highest since May 2020 against the euro – as a contributing factor to euro weakness. [GBP/]

There was also focus on a story by Bloomberg News, which reported the European Central Bank was conducting its bond purchases with specific yield spreads in mind, a strategy that would be reminiscent of yield curve control.

Elsewhere, the risk-sensitive Australian dollar gained 0.4% to $0.7727. The New Zealand dollar, also a commodity currency like the Aussie, gained 0.25% to $0.7133.

DOLLAR WEAKNESS

While the world will be watching Joe Biden’s inauguration as U.S. president at noon in Washington (1700 GMT), traders were more focused on his policies than the ceremony.

U.S. Treasury Secretary nominee Janet Yellen urged lawmakers at her confirmation hearing to “act big” on stimulus spending and said she believes in market-determined exchange rates, without expressing a view on the dollar’s direction.

The index that measures the dollar’s strength against a basket of peers was up almost 0.1% at 90.510. The euro forms nearly 60% of the dollar index by weight.

It also fell 0.1% against the Japanese yen to 103.81 yen per dollar.

While the dollar has perked up in recent weeks on the back of a rise in U.S. Treasury yields, investors still expect the currency to weaken.

“We remain bearish U.S. dollar, and expect the downtrend to resume as U.S. real yields top out,” said Ebrahim Rahbari, FX strategist at CitiFX.

“Continued Fed dovishness remains important for our view, in addition to global recovery, so we’ll watch upcoming Fed-speak closely.”

Positioning data shows investors are overwhelmingly short dollars as they figure that budget and current account deficits will weigh on the greenback.

(Graphic: Dollar positioning: https://fingfx.thomsonreuters.com/gfx/mkt/oakveyombvr/Pasted%20image%201611132945366.png)

UBS Global Wealth Management’s chief investment officer Mark Haefele reiterated a bearish view on the dollar, saying that pro-cyclical currencies such as the euro, commodity-producer currencies, and the pound would benefit “from a broadening economic recovery supported by vaccine rollouts”.

The cryptocurrency Bitcoin fell 4%, trading at $34,468.

(Reporting by Ritvik Carvalho; Editing by Angus MacSwan)

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England soccer star Rashford nets younger buyers for Burberry

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England soccer star Rashford nets younger buyers for Burberry 3

By Sarah Young

LONDON (Reuters) – Burberry stuck to its full-year goals on Wednesday after a media campaign fronted by high-profile English soccer star and social justice advocate Marcus Rashford drew a younger clientele to the British luxury brand.

Higher full-price sales would boost annual margins and Asian demand remained strong, Burberry said, while warning that it could suffer more sales disruption from COVID-19 lockdowns.

Manchester United striker Rashford, 23, has won plaudits for his campaign to help ensure that poorer children do not go hungry with schools closed during the pandemic.

A first coronavirus wave last year cut Burberry’s sales by as much as 45% before a bounce back on strong demand in mainland China and South Korea, which continued in the last few months.

Shares in Burberry were up 5% to 1,825 pence at 0905 GMT, with Citi analysts saying that improved sales quality from fewer markdowns would drive full-year consensus upgrades.

Burberry’s 9% sales decline in its third quarter was worse than the 6% fall in the second, and the company said that 15% of stores were currently closed and 36% operating with restrictions as a result of measures to curb COVID-19’s spread.

“We expect trading will remain susceptible to regional disruptions as we close the financial year,” Burberry said, adding that it was confident of rebounding when the pandemic eases given the brand’s resonance with customers.

In the third quarter, comparable store sales in Europe, the Middle East, India and Africa declined 37%, hit by shops shut in lockdowns and a lack of tourists visiting Europe, but in the same period, it posted sales growth of 11% in Asia Pacific.

Burberry said that Britain’s new relationship with the European Union would cause headwinds, warning of a modest increase in costs to comply with new rules and also the impact of an end to a scheme for VAT refunds for non-EU tourists.

This would make Britain a less attractive destination for luxury shopping when tourism returns after the pandemic, Burberry said, adding that it would try to mitigate the effect.

(Reporting by Sarah Young; Editing by Kate Holton, James Davey and Alexander Smith)

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