Considerations – Leasing Financial Instruments


Considerations if you are looking into leasing a financial instrument
Imagine there is a very wealthy investor with Euro 10 million in liquid cash. He is supposed to issue an SBLC to support a third party. Let us assume this third party is you. Let us further assume, it is your intention to borrow Euro 7 million from a Monetizer or a Bank and you need a financial instrument to back up your loan.

To get you the instrument, the Investor now will have to physically deposit and commit his Euro 10 million in his issuing bank to emit the Standby Letter of Credit for you. Obviously, no bank will not issue a Standby Letter of Credit without collateral on account of the Applicant. With the investor’s money as collateral, the bank will issue the Standby Letter of Credit to your benefit.

Now let us assume that the terms of the Standby Letter of Credit allow you, as the beneficiary of the Standby Letter of Credit, to borrow the Euro 7 million that you require and you are using the Euro 10 million Bank Instrument as a guarantee for repayment.

In this scenario, you would be the “Lessee”. It is probably your idea to lease the Standby Letter of Credit for Euro 500,000 (5%) or less for 365 days and use it as collateral for the Euro 7 million loan that you seek. Being the “Lessee” you pay the Investor/Applicant just Euro 500k as an upfront fee. In the next step, you borrow Euro 7 million from your Bank or Monetizer using this Standby Letter of Credit as collateral.

If you would default on the repayment of that loan, your Bank or your Monetizer would call on the Standby Letter of Credit for payment.

In this case, the Issuing Bank pays the Lender Bank Euro 7 million. The Issuing Bank wants to be reimbursed for the Euro 7 million it paid to the SBLC receiving Bank or Monetizer. The Issuing Bank now goes back to the Euro 10 million on deposit made by the Investor/Applicant and takes Euro 7 million from that deposit and reimburses itself for the drawdown made on the Standby Letter of Credit. The Investor/Applicant now has lost Euro 7 million plus fees, interest, brokers’ fees, etc.

Here is a summary of the transaction: The first person, the Investor/Applicant, with the cash backing of Euro 10 million to issue the Standby Letter of Credit for the second person’s benefit (you) risks Euro10 million in exchange for a payment of just Euro 500k leasing fee, less fees probably paid to brokers. The Investor/Applicant risks Euro 10 million in exchange for a payment of Euro 500k leasing fee.

If you would be the very wealthy Investor/Applicant, would you be willing to make that deal? Would you put up Euro 10 million at risk to make just Euro 500k? Nobody would risk Euro 10 million and probably lose Euro 7 million (as in this example) for a return of just Euro 500k!

So a leasing transaction is not that simple and the borrowing process of financial instruments has to be well understood and the transaction will have to be well structured. I can help you avail and utilize such instruments and professionally structure the transaction if you are a qualified client for a Prime Bank instrument, an instrument issued by a Private Bank, or if you qualify for a 3 year corporate guarantee.