Introduction to Surety

A Surety bond is a financial instrument issued to guarantee the contractual obligations of one party to another.

Operating as a tripartite agreement between; The principal, the party performing the obligation; the Surety acting as Guarantor and the Beneficiary who the bond is in favour of.

Surety bonds do not operate as a risk transfer like traditional forms of insurance, they are a contract of guarantee made available on recourse terms and are considered an unsecured line of credit.

Benefits

Surety bonds are an attractive alternative to guarantees issued by a bank, especially relevant, considering banks often take a secured position and ringfence funds to the aggregate value of the guarantees issued. A surety takes an unsecured position being reliant only on an Indemnity Agreement.
Despite the unsecured position, the Surety is often able to deliver a rating structure competitive with that of the banks and in most situations a more linear and transparent pricing matrix.
Utilising the Surety market enables organisations to free up banking lines and enhance working capital, this money can then be used for alternate financing activities otherwise disused for growth and development.
Surety facilities are a contingent liability and therefore listed off balance sheet

Indemnity Agreement

The Agreement of Indemnity is a legal agreement that underpins the Surety’s right to a recovery in the event of a bond being called. If the principal breach their obligations or become insolvent the beneficiary would be entitled to trigger a claim under the bond.

The Surety would meet that claim then seek subrogation via the Indemnity Agreement.

Underwriting Considerations

Due to the very rigorous underwriting process within the Surety Market, it is considered a credit enhancement when an entity establishes a facility with a Surety provider.

The Surety market underwrite on a zero-loss philosophy, therefore a Surety would not provide a facility if they were uncomfortable with the creditworthiness of the principal or their ability to perform under the contract. The main principles a Surety considers as part of the underwriting process are:

The Surety market underwrite on a zero-loss philosophy, therefore a Surety would not provide a facility if they were uncomfortable with the creditworthiness of the principal or their ability to perform under the contract. The main principles a Surety considers as part of the underwriting process are:

Credit:

Review of the company’s credit worthiness.

Capital:

Assessment of the financials, is there sufficient cashflow in the business with positive net worth and profit.

Capacity:

What is the current work in progress and secured order book. Is there adequate number of skilled employees or equipment to duly perform under the contract.

Character:

What is the reputation in the industry, is there any ongoing or previous disputes. The Surety will often require a meeting with the key stakeholders in the business to understand the ownership and continuity of management.

Contact one of our experts to schedule a meeting allowing us to understand your specific requirements, your business and how Surety can be commercially advantageous to you.

In order to approach the surety market we would require the following information, being common practice when providing an initial evaluation:

Group organisational structure chart (if applicable)
Most recent consolidated management accounts including: Balance sheet, P&L and Cashflow
Most recent consolidated filled accounts
12-month forecast
Summary of the types of guarantees that you currently provide or require
Bond Application form

Please note the above information will suffice in providing an initial review but further information will likely be required once we progress your application.

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