Letter of Credit Replacement Surety

Historically, there was little appetite from surety underwriters to provide a guarantee replacing letters of credit and an unwillingness by insurers to accept/consider an alternative to a Letter of Credit (LoC).

Marsh’s Surety Practice has worked closely with the UK surety market to develop appetite for this product and create suitable wordings. Many of the sureties are now comfortable in issuing a full on-demand guarantee, which provides the beneficiary of the guarantee a like-for-like payment mechanism to a letter of credit.

We are finding that more insurers are now happy to accept a surety guarantee as a LoC replacement. One major factor that has influenced this is the downgrading of several banks, some of which now fall under the minimum credit rating criteria requirements set by the carriers. In contrast, most of the sureties have a Standard and Poors’ rating of at least AA-.

Advantages of Replacing LoCs with a Surety Bond

• Free up banking lines: the stark contrast with a surety bond is that the capacity provided by the sureties does not impact on a group’s banking facility, thus freeing up working capital for core business activities.
• Obtain more competitive pricing for bonds: the cost of capital for sureties is different to that of banks and often allows the surety market to offer very competitive pricing, where appropriate.
• Access additional capacity: additional capacity is often available for clients to utilise for other guarantee requirements they may have; there would be no cost implications of having the additional capacity available. Costs are based purely on utilisation.