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Bonds vs Bank Guarantees or Letters of Credit (LOC)

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Why do you need Bond Insurance?

Bond insurance protects bondholders from default by the issuer by guaranteeing repayment of principal and sometimes interest. Issuers of bonds that purchase this type of insurance can receive a higher credit rating on those bonds as a result, making them more attractive to some investors.

  1. Bank guarantees are collateralised in cash or assets tying up credit funding lines. Bonds are mostly not collateralised.
  2. Bank guarantees therefore reduce the business’ access to capital. This reduction in liquidity is counterproductive and can in fact contribute to the default scenario they are designed to guard against.
  3. Issuing of bank guarantees is a notoriously lengthy and bureaucratic process.
  4. It can sometimes take as long as two years for a bank to release the collateral or indemnity held under an LOC.
  5. Organising a bond is quicker and much easier.

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