Strategic financing alternatives for Commtech companies

18 January 2016

Corporations within the Communications, Technology and Media (CTM) sectors operate across a broad range of commercial environments and typically may have in place significant-sized and/or a large number of commercial contracts. In particular many may require some form of commercial guarantees in order to satisfy these contractual conditions.

For significantly large infrastructure or other capital-intensive projects (e.g. physical telecommunications infrastructure rollout, manufacturing plants, integrated technology equipment, large-scale IT projects etc.) CTM corporations may indeed require Letters of Credit (LOCs) or bank guarantees running into the USD 10s or 100s millions.

These requirements are commonly addressed by (i) purchasing bank guarantees, and/or (ii) using secured company assets, therefore tying up working capital accordingly. Both can cause CTM corporations significant issues in terms of high costs and tying-up working and investment capital. 

As an alternative strategic financing tool, surety bonds can help to alleviate both of these key issues – providing the guarantees required whilst still retaining access to existing working capital facilities. Furthermore, the surety bond marketplace, and commercial environment, has evolved significantly the past few years and these solutions are now providing increased value for a broad variety of CTM corporations.

What are surety bonds?

A surety bond is an undertaking from an insurance company (surety) to pay a specific sum to a beneficiary on certain specified conditions, such as company insolvency or contractual default. 

Surety facilities are unsecured and treated as a contingent liability thus off balance sheet. The surety company will be placed alongside other unsecured company creditors by way of an indemnity agreement, allowing a company to make best use of its assets. Many of our clients view them as an active treasury tool or strategic financing alternative. 

Typical parties to a surety bond

Surety bonding is not insurance per se as the principal does not transfer any risk to the surety. In the event of a call under a bond and payment is made by the surety – the insurance company has ultimate indemnity recourse back to the principal for recovery of their monies paid to the beneficiary.

This is a preview of our detailed paper, to obtain the full version please contact Kate Payne, Head of Comm Tech on +44 (0)20 7528 4445 or email kate_payne@jltgroup.com 

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