Bond insurance is the insurance industry’s equivalent to the aval guarantee offered by banks. Bond insurance has two major advantages: no restriction on the credit lines provided by the bank and a high degree of flexibility, especially when it comes to specific challenges.
does not negatively impact credit facility/credit rating
also suited to “difficult” industries and business situations
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Many purchasers require their suppliers to provide a guarantee- for example, in the form of sureties. Typically, such guarantees are provided by banks as ‘avals’. However, the amount of bank guarantees made available to you counts against your overall credit line and therefore restricts your financial room to manoeuvre. Bond insurance provides all the same guarantees but it does not impact your liquidity. This makes this option particularly interesting for businesses in sectors from which banks are withdrawing. Companies that have just undergone – or are in the middle of – restructuring are particularly unattractive to banks because of the higher equity capital requirement. Insurers, on the other hand, do not have the same equity capital requirements. As such, they are prepared to take on more risk. In doing so, they look not just at the probability of default but also at the individual types of guarantee available. This leads to significant differences in the evaluation of collateral you need to provide.
While the cost of your bond insurance depends, to the most part, on your own rating, importance is also attached to your business forecast. Banks, on the other hand, look more at your past financial performance. This means insurers may well assess your business more positively than your banks.
However, even if your creditworthiness is not an issue, some banks are not willing, or are no longer able, to provide enough equity capital to cover the entire amount required. In such cases, they are happy to take on a part of the guarantee and leave the rest to an insurer. What is more, banks cannot provide for certain cost structures, such as the consortiums common in some industries, for example the construction industry. Insurance companies, on the other hand, are as unperturbed by such structures as by certain countries and industries.
They also offer a lot of flexibility in fronting matters: For example, if a German insurer doesn’t hold a license for a certain country then one of the insurers or banks in the country in question issues the surety or guarantee on behalf of the European insurer. Insurance companies also accept fronting by banks if the customer insists on a bank aval. Fronting is possible anywhere in the world and does not involve high fees. Fronting partners do not charge commitment fees either.
Generally, bond providers offer maturities of up to ten years. That said, 10-year maturities are the exception: In investment-heavy industries, such as the energy sector, sureties are often linked to the commercial contract periods, which are usually shorter.