What are on-demand payment bonds?

Allianz Trade offers On-Demand Payment (ODP) bonds that provide collateral for assurance in the Energy industry to help accelerate growth and increase liquidity. On-Demand Payment bonds are accepted assurance methods that offer several key advantages.

  • 100% risk cover
  • Maximizes working capital by reducing the capital constrained by posting requirements
  • Bond is unsecured and ‘callable’ at any time during the coverage period
  • Bond pays out within the same time frame as other instruments
  • Priced competitively
  • Premium paid by Principal
  • Expanded collateral optionality

Every written letter of credit and bond have subtle differences in the wording. A letter of credit an be posted to guarantee a purely financial obligation also known as a financial guarantee , such as a loan, or a performance obligation, such as a contract, while the On-Demand Payment or Performance bond is posted to meet specific performance, payment, and liquidated damages obligations as defined in the underlying contracts. A bond cannot guarantee a loan or a financial hedge.

From a balance sheet perspective, a letter of credit is a secured instrument that reduces access to capital and overall liquidity, while an ODP is an unsecured instrument that does not tie up capital and improves liquidity.

A number of obligations in the energy sector can be covered by an on-demand bond, including short and long-term tolling agreements as well as Independent System Operator (ISO), rail car lease, and commodity supply obligations.
While the cost of an on-demand bond is similar to letter of credit pricing, the primary benefit of an on-demand bond is the ROI of turning under-utilized capital into revenue generating funds.
With an on-demand bond, there is a 100% cover that is callable 365 during the coverage period. Most ODP bonds are also callable in the event replacement collateral is not received should there be a non-renewal under a long term, evergreen contract; aligning with the same mechanics as a letter of credit .
Yes, a number of major North American pipeline operators now accept the ODPs as an acceptable form of adequate assurance for firm transport and precedent agreements.
Yes, some major ISOs have started to accept ODPs, but not all. Other forms of unsecured collateral are available for qualified candidates to ISOs who do not accept ODPs.  

Yes, a number of major North American commodity suppliers now accept on-demand bonds as an acceptable form of adequate assurance for industry standard commodity supply agreements.

Because the contracts are bi-lateral, the acceptance review is much quicker. In addition, many of these entities use on-demand bonds for their own collateral optimization strategies.

Yes, our credit rating is superior to most banks providing letters of credit in the energy space; this typically provides an upgrade for obilgees/beneficiaries.
Yes, the Surety & Fidelity Association of America (SFAA) oversees on-demand bonds and ensures that best practices and standards are being followed.
A fronted letter of credit provides an alternative form of assurance when a beneficiary/obligee won’t accept an ODP directly, for a contract or transaction that would otherwise be eligible for a bond.
A fronted letter of credit works by a bank partner posting the letter of credit on the principal/applicant/customer’s behalf and Allianz Trade providing a guarantee to the bank. Allianz Trade then holds the risk of the principal/applicant/customer in normal due course. The beneficiary or obligee receives a standard letter of credit from a qualified bank satisfying collateral requirements; the principal/applicant/ customer gets unsecured treatment from the instrument on their balance sheet.
No, fronted letters of credit can only be used to provide assurance to meet performance, payment, and liquidated damages to the obligations as defined in the underlying contracts, and to performance obligations as defined in the underlying contracts. Financial guarantees may not be secured.
We work exclusively with banks rated A- or better, that would qualify as an acceptable bank to all major energy industry participants.
Yes, there is an additional fee to the bank for facilitating the arrangement. The fee depends on which bank provides the fronting arrangement. Typically, the all in cost aligns favorably with average letter of credit costs.
Typically, it will take 2-3 weeks to review language and get approvals in place for a fronted letter of credit and/or on-demand payment bond facility. Once the facility is enabled, execution of fronted letters of credit align with similar industry timelines.

There are typically three reasons why a fronted letter of credit might be used:

  • The Counterparty and/or collateral beneficiar y does not accept bonds and will only accept letters of credit.
  • The principal wants to capture the liquidity advantages of an unsecured instrument. 
  • The total cost of a fronted letter of credit in addition to gaining capital relief and increased liquidity typically provides more cost effective economics in comparison to traditional letter of credit costs. 

 

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At Allianz Trade we value your time and will try to respond to your enquiry on the same working day. ​Some questions may take a little longer to answer, but we ​aim to provide you with a response within 3 working days.

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