Commercial bonding is typically used to guarantee payments to government institutions or free up working capital from other credit institutions.
Goods imported into the UK can be subject to import tax, customs or excise duty on arrival into the UK, and this payment is usually due immediately. However, a duty deferment, customs bond or movement/transit guarantee bond allows importers to defer this payment for 30 days, providing greater flexibility and a cash flow advantage.
Typical applicants can include importers/exporters, along with freight forwarders (e.g. food, alcohol and clothing).
Decommissioning/Restoration Bonds/Environment Agency bonds
Decommissioning is fast becoming one of the most severe challenges in the energy industry today. Over the course of the next decade, a considerable number of assets will reach their end-of-life. While the sector is still relatively new, decommissioning of offshore infrastructure will continue to increase as more and more assets reach 15 years +. Typically, owners of gas and oil assets are liable for the cost of decommissioning once production has ceased on a particular field, and this liability must be guaranteed.
Restoration bonds are typically sought for projects which may have a detrimental impact on the environment. e.g. mining, renewable infrastructure, landfill waste or quarrying operations. Generally a pre-requisite of planning permission, a form of performance bond is required to ensure that the landscape is restored following completion on the project as agreed upon by the operator and the government/local authority (e.g. the Environment Agency).
Other legal obligations in favour of the Environment Agency (e.g. transhipment of waste) can also be guaranteed.
As an alternative to providing a letter of credit from a bank which invariably ties up working capital facilities, a surety bond/guarantee can be arranged, which generally is on an unsecured basis and as such does not tie up valuable working capital facilities.
Pension Deficit Guarantees
These types of bonds provide security to the pension fund in the event of sponsor insolvency or non-compliance with an agreed deficit recovery plan. They can be structured to help release assets and/or improve working capital.
Deferred Consideration Bonds
Often provided in favour of a landowner on behalf of a housebuilder or property developer when the purchase of land is arranged on a deferred payment basis. This type of bond will guarantee payment of instalments to the landowner in the event that the housebuilder or property developer defaults on their repayment.
More recently, deferred consideration bonds have been used as part of merger & acquisition transactions to guarantee a future obligation.
Compulsory liability insurance products, such as employers’ liability, create an obligation on insurers to settle claims without deduction of any excess in the event of a claim. Thus, if you have volunteered to carry a sizeable monetary excess in exchange for a reduction in your premium, your insurer may require you to provide a deductible guarantee (or letter of credit) as security against the risk of your non-payment of that excess, in the event of your insolvency.
Letters of Credit Replacement
In order to release working capital and avoid the need for security or providing a letter of credit, it may be possible to obtain a payment guarantee from a specialist surety company instead.
Whilst letters of credit are commonplace in commercial and international transactions, surety bonds can be an efficient use of an alternate source of capacity at competitive rates e.g. companies with high deductibles listed on their insurance policies may be asked to provide their insurer with a letter of credit from the bank in the event that they are unable to meet the cost of the deductible.
Local Government Pension Scheme Bonds
Under the local government pension scheme requirements, staff transferred from the employment of local authorities to private sector companies may choose to continue with the local government pension scheme.
This type of guarantee protects the local authority from loss in the event that the private sector company defaults in payment of contributions to the pension fund.
Road and Sewer Bonds
Highways and sewer bonds are required to satisfy agreements under the Highways, Water and Planning Acts, as well as other statutory provisions. These road or highway bonds guarantee the completion of roads and sewers to a specific standard, enabling them to be adopted by the relevant authority.
- Property developers
- House builders
- Local authorities
- Statutory agencies
- Utility companies