International guarantees: an enabler for companies’ international expansion
International guarantees, also known as “bank guarantees,” “guarantee bonds,” or “standby letters of credit,” are a key tool for companies that operate internationally, as they ensure that economic obligations will be properly performed. Under this instrument, the guarantor expresses a willingness to fulfill the commitments of the principal obligor facing a third party if the principal fails to do so.
Companies are increasingly global in scope and their business reaches beyond the borders of their home countries. However, international trade implies a higher level of commercial risk than domestic relationships. An ideal tool for mitigating the risk is the international guarantee. This enables a company that wishes to expand its business overseas to gain access to local tenders, major projects, real estate purchases and rentals, and financing for their foreign subsidiaries.
Under an international guarantee, a bank guarantees the solvency of its customer in front of a foreign bank, which then issues another guarantee in favor of the public or private entity that requires it. Depending on the project, there are different types of international guarantees, which are considered technical by nature and shaped by the specific purpose at hand:
- Bid bond: often required of companies that wish to take part in a tender for the award of major public or private construction projects.
- Advance payment bond: It guarantees the down payment made at the beginning of a project.
- Performance bond: this guarantee helps ensure that the company who was awarded with the project performs its contractual obligations.
- Maintenance or warranty bond: it provides quality assurance for a given term after project completion.
Guarantees can also be financial in nature, governing payment obligations between the parties. They back the financial solvency of the bank's customer. Another type of financial guarantee secures credit facilities and it enables a company’s foreign subsidiaries to obtain financing.
The issuance of international guarantees, also commonly known as bonds or standby letter of credits, involves the participation of two foreign financial institutions. This requires the support of experts such as the BBVA International Financial Institutions team. BBVA bankers create and maintain relationships with international banks, that enables them to play a key role in getting better terms and achieving agile and effective service delivery of international guarantees. BBVA has the capability to provide business customers with preferred terms and conditions in various regions around the world and information about usual business practice in foreign markets. Benefits are maximized when guarantees are structured between BBVA Group entities, thanks to the very close relationships between them and to the agreements in place, which facilitate and speed up the process from beginning to completion.
An excellent opportunity to leverage guarantees has now emerged from the Next-Generation EU program, an instrument adopted by the European Council to drive recovery by using investment and reform to counteract the adverse effects of the pandemic on the economies of European Union countries. A further goal is to make the overall economy and employment more sustainable and resilient, while getting it ready for future challenges. Under this plan, banks such as BBVA act as conduits for proposed projects, and, in this key role, international guarantees are an essential tool.
Natural disasters and war can leave behind an aftermath of severe problems that call for reconstruction of infrastructure and public services. This is where banks such as BBVA can help by supporting reconstruction projects with different solutions, being international guarantees one of them.
Latin America is a key region for international companies. BBVA's strong presence there will enable the bank to take part in the major projects launched in coming years through the issuance of international guarantees. With the support of these financial instruments, BBVA clients can also strengthen ties with other banks within the financial group that will help them achieve their cross-border expansion goals.