A Corporate View of Trade Finance: Structuring Guarantees and Standbys at the Bid Stage

From Banking to the Corporate Trade Finance Desk

Before joining AtkinsRéalis, I built my career within international banks: Bank ABC, BNP Paribas, and HSBC. I had the opportunity to develop my expertise in trade finance in different areas: on the operational side (mainly in processing bank guarantees, standby letters of credit, commercial LCs, and documentary collections), and in managing and organizational role, to an advisory and client-facing role. As a client service manager, I had responsibility for a portfolio of premium corporate clients, acting as their main point of contact for trade finance related matters. Interacting with corporate clients, understanding their needs and challenges, helping them find tailored solutions to mitigate their risks and ensure a smooth and fast processing of their transactions, inspired me to leverage my experience and knowledge on the corporate side.

I have been working at AtkinsRéalis, a world-class engineering services and nuclear company, for the past eight years, where I am currently managing the Trade Finance Team. In this role, I focus on optimizing financial risk management, strengthening good relationships with our bankers, and supporting our company through structured and efficient trade finance solutions.

Why Trade Finance Matters for Corporates

Trade finance plays a critical role in mitigating risks for both buyer and seller, while facilitating trade of goods and services between parties.  As applicant, a bank guarantee or a standby LC provides the following advantages:

Bid security: enables a bidder to submit a bid offer without requiring cash collateral or other securities to backup the bid offer and avoid disqualification.

Retention security: improves the company’s cash position by releasing funds that would otherwise be retained until the contract is fully executed.

Advance payment security: allows payment of funds usually necessary to start the job and reduces strain on the cashflow during the early stage of the project.

Performance security: supports commencement of the project and permits the presentation of invoices for payment as contract milestones are achieved. It is sometimes required as a prerequisite for finalizing the execution a contract.

How Corporates Structure Guarantees & Standbys During Project Bidding

Unlike in the banking sector, corporates are involved at a very early stage: from the bid review and proposal phase. Projects may vary from engineering studies, consultancy services, nuclear energy, operations and maintenance, each with its own complexity. We support and advise our business units world-wide and locally (Canada, USA, Latin America, North Africa, Middle East, APAC, Europe and UK), as well as our corporate functions for all matters related to bank guarantees, standby LCs and commercial LCs.

For each bid proposal, our involvement begins with a keen understanding of the project: its nature, scope of work, geographical location, duration, milestones, and life cycle of the contract. This step is essential to ensure that our input and recommendations are fully aligned with the singularities of the project.

We then review the contractual requirements in terms of bank guarantees and standbys.

Afterwards, we conduct a risk analysis to determine red flags or any key detrimental clauses or wording that might put our company at risk or be rejected by our bankers such as: an open-ended bank guarantee (indefinite exposure), free transfer clause without prior written consent of the bank (compliance concerns), contractual obligation for the Applicant to reinstate the bank guarantee amount to its face value when a compliant claim is honoured (higher exposure), missing requirement for the Beneficiary to provide nature of the breach when a claim is made (risk of wrongful claim).

Based on this analysis, we review the sequence and specifics of all required trade finance considerations (value, amount variation clause if needed, full duration, start and end dates) to ensure consistency with the contract milestones. We also structure the terms and conditions of the instrument to formulate wording acceptable to all parties (Applicant, Beneficiary, and Banks) that fits with the nature and specifics of the project.

Finally, we provide indicative bank charges pricing to be implemented in the global financial offer submitted to the client.

When Corporates Engage Their Banks

We involve our banker as soon as we determine our need for a trade finance instrument. We select from among our bank partners who will support us with the transaction. We take care of formulating issuance or amendment instructions and send them to the bank for processing.

When the wording of the intended instrument is not standard, we involve the bank as early as possible ahead of the required issuance date and we negotiate with our banker acceptable wording to all parties.

How a Bank can Help a Corporate Succeed

We are fortunate to work with a panel of banks capable of supporting our trade finance needs. What sets a bank apart is when it can:

• Understand the urgency and importance of a transaction. Time is of the essence, so processing time is very crucial. If a bid security cannot be issued on time, it may result in disqualification and ultimately a business opportunity lost.
• Understand a client’s needs, challenges, and the overall picture of a project transaction. When a bank has a comprehensive overview of a given transaction, it facilitates processing. We clearly see the added value when a bank is flexible and follows a collaborative approach instead of a rigid processing approach. Our role as a client is to help the bank grasp the intricacies of the transaction.
• Provide solutions to overcome obstacles. This includes suggesting revised clauses acceptable to all parties in lieu of problematic wording which enables the transaction to move forward efficiently.

Common Guarantee Clauses That Require Adjustment

We see some clauses in guarantees and standbys that deviate from standard banking practice and go beyond what is usually acceptable. Applicants quite often find themselves caught between imposed wording and a bank’s refusal to support. Our role is to lead the discussion and reach an agreement that satisfies all parties.

Some examples of revised clauses with changes marked in bold:

• Transfer and assignment clause without bank’s prior consent. Often ‘’transfer’’ and ‘’assignment’’ are used interchangeably, although the two concepts differ. Workable wording could be: “you may assign or transfer your rights and benefits under this Bank Guarantee, with the prior written consent of the Bank (such consent not to be unreasonably withheld or delayed).”
• Clause obliging the bank to contravene the law. To be noted is that banks are precluded in the event of any court injunction from making payment. An acceptable clause could be: “No action, event or condition save and except in case of any court order/injunction issued by a competent authority in [insert country location of the Issuing Bank], which by any applicable law should operate to discharge us from liability hereunder shall have any effect and we hereby waive any right we may have to apply such law so that in all respects our liability hereunder shall be irrevocable and, expect as stated herein, unconditional in all respects.”
• Amount variation clause allowing the bank guarantee amount to increase with no cap. A revised clause in a retention security could be: ‘’Each time the Bank receives written notice from the Beneficiary certifying that an additional amount as being due to the Applicant under the contract, the amount so guaranteed by the Bank from time to time hereunder shall immediately be increased by an amount that is equal to X% of the amount so certified. You may issue one or more such notices, provided that the amount of this Bank Guarantee shall never exceed an amount equal to X% of the contract price. The amount of the contract price is [insert the currency and amount of the contract price].’’

Some food for thought:

• Foster the advisory role of banks towards their clients (Applicants and Beneficiaries). With the support of banks, the message is more likely to be understood and applied.
• Educate clients to use ICC rules as a common framework.
• Encourage clients to use the most appropriate set of rules for each trade finance product type: UCP 600 for commercial LCs; ISP98 for standby LCs; and URDG 758 for bank guarantees.

We continue to see standbys subject to UCP 600. Although permissible, in my experience, ISP98 is the most appropriate set of rules for standbys and UCP 600 should be kept for commercial LCs.

Common Challenges in Guarantee and Standby Wording

As Applicant, one of the main hurdles we face is an instrument with open-ended validity. The Applicant will be at the mercy of the Beneficiary to obtain release under the security. This situation becomes particularly problematic when the project is fully completed, whereas the release is not granted by the Beneficiary. In this case, the Applicant will unfairly incur bank charges and limits will remain marked against the outstanding exposure.

Some alternatives can be explored to manage this hurdle:

• Fixed expiry with buffer. Ask the Beneficiary to replace open-ended validity with a fixed expiry date that would include a long buffer on top of the expected expiry date (six months, for example). This would provide the Beneficiary a sufficient time period to take any action, if need be.
• Modify expiry date to insert a fixed end date. The clause could be worded as follows: “This Bank Guarantee will expire at the earliest of: presentation of a completion certificate signed by the Beneficiary or [insert a fixed expiry date dd/mm/yyyy corresponding to the expected Bank Guarantee release date].”

In some cases, Beneficiaries insist on keeping an open-ended expiry. We review such instances on a case-by-case basis. A risk assessment decision is made based after evaluating criteria such as the nature of the project, duration and dollar value of the project, track record and relationship with the Beneficiary.

It is also essential to maintain good collaboration and communication with our business units, they will help to closely monitor the work progress and, once the project is completed, ensure the Beneficiary provides a release.

When some punch list items remain unsolved between the two parties, the Applicant will try to negotiate a partial release until an agreement is reached. It will permit reduction of the overall exposure, lessen the weight of bank charges, and free up space under the credit facility.

Another mitigation measure is to include in the contract a clause that obliges the client to promptly proceed with cancellation and return the original security to the issuing bank within an agreed timeline once the Applicant’s obligations are fulfilled.

A Corporate Playbook for Trade Finance

• Understand the scope of work and nature of the project from the outset to ensure full alignment with the terms and conditions of the security.
• Engage with your bank partner to discuss your specific needs.
• Cap liability and exposure by clearly defining the maximum amount and duration of the security.
• Identify the breach or default in a demand for payment.
• Include prior bank’s consent for transfer of the security and assignment of proceeds.
• Apply the appropriate ICC rules set to govern the instrument.
• Include a reduction mechanism in an advance payment security and right to claim only when advanced funds are paid to the Applicant.
• Avoid clauses that tie the security to the underlying transaction in order to reinforce the independence principle.

The views and opinions expressed in this article are those of the author and do not reflect the position of the author’s employer.