The take-up of surety bonds as an alternative to bank guarantees is soaring and shows no sign of slowing, says a Gallagher specialist.
Racheal Tumelty, Head of Credit, Surety & Political Risk at Gallagher, said that the infrastructure, renewable energy and construction boom in Australia’s eastern states, allied with a revival in Western Australia’s mining sector, has made 2018 a high-demand year for surety bonds.
"With strong local market support and competitive rates available, the take-up of the product is soaring," said Tumelty. "Surety bonds provide the ability for businesses to free up valuable working capital to achieve the next phase of their expansion, growth or acquisition journey."
A mechanism for shielding the beneficiary from financial loss should a contractor fail to meet their contract terms and conditions or fail financially, the bonding process goes back centuries and has evolved to become an integral part of commercial transactions. Historically used in the construction, infrastructure and resources sector, surety bonds are now increasingly being used across other industries.
"The beauty of surety bonds is that they operate exactly the same way as a bank guarantee facility, offering an unconditional and on-demand instrument," Tumelty continued.
"The fundamental difference is that bond issuers don’t require cash backing or any other tangible security, unlike banks which may require up to 100% cash collateral to issue a bank guarantee or take a general security agreement (GSA) over the business or other tangible property assets."
With surety bond providers in Australia required to be approved by the Australian Prudential Regulation Authority (APRA) and ranging from Standard & Poor’s (S&P) A to AA- rated, from a financial strength perspective they are akin to the four major banks.
The benefits of surety bonds
With favourable market conditions in Australia, Tumelty says the benefits of bond facilities are clear.
"Surety bonds essentially free up valuable working capital for businesses to reinvest, reduce debt or tender on additional or larger projects without being hamstrung by putting up cash collateral or other tangible security typically required by the banks," she said.
"They are an efficient and cost-effective way of financing contractual security obligations and the freedom they offer to grow, expand and enhance the liquidity of a business cannot be understated."
This subject is explored in greater detail in the latest Gallagher Market Overview Report, Reflecting on a year of change. The report is available as a digital download.