Few companies can succeed in winning large international contracts without the right kind of assurances in place. Above all, that means guaranteeing that they will fulfil all their obligations across each phase of the project – from the bidding stage and securing of potential advanced payments, through to their performance throughout the project’s execution, as well as a warranty to cover the delivered work. The promise: if an important aspect of the project doesn’t go to plan, then the customer can access compensation.
That is where surety bonds and bank guarantees play a critical role. By appointing a trusted, third-party guarantor to provide a security on the obligations, confidence can be built directly into the contract relationship – even when a project is complex, runs for multiple years, and needs to be executed in unfamiliar international territory.
Those were the challenges faced by one major European company in 2021 when it was selected for a five-year, US$600 million contract in Brazil – part of a vast project being undertaken by one of the country’s largest multinationals. The surety bond it put in place – with the help of Allianz Trade – was, naturally, a pre-condition for participation in the contract. But it was also a foundation for the contract’s ongoing success, largely because of the advantages that flowed from working with a global insurer rather than seeking a guarantee from its banking partners, or working with a niche bond provider.
High capacity, high complexity
On the surface, the company’s surety bond – a performance bond – was not dissimilar to the many such bonds issued each year across multiple industries in support of major projects in construction, machinery, transportation, real estate, and elsewhere. The objective was to provide the contractor’s Brazilian customer with a guarantee that it would be compensated in the case of any performance shortfall or default, so the work could be successfully completed.
Going for a local or specialist supplier of bonds was never going to be sufficient in this case, as the requirement turned out to be for a bond facility of up to $60 million and for international delivery. While there are many surety companies specializing in providing lean, low-cost bond services, they tend to restrict cover to specific geographies and lower bond amounts.
But the complexity, value and international reach of this project meant the contractor needed to partner with a bond issuer with the capacity – and rock-solid reputation – to give it confidence in the deal. With the strength of the Allianz Group behind it – and boasting an AA credit rating from S&P – Allianz Trade was one of only a handful of companies worldwide in a position to respond to such a high bond demand, both in terms of the surety risk that needed to be taken on, and the international reach.
Legal expertise in bond structuring
In backing a single bond of this size, Allianz Trade was keen to set up the most suitable deal structure for the client. The insurer provided sufficient capacity to issue the full bond, but created a balanced risk spread by ceding part of the risk to another highly rated industry partner – all in agreement with the client but without having to bother the beneficiary, the project owner. A win-win situation as the client’s bond requirements were met, the beneficiary only had to agree on the bond with a single guarantor, and the risk was spread judiciously.
From the Brazilian contract owner’s viewpoint, Allianz Trade was the only company answerable for the bond – despite the shared surety risk. If the contract did run into any trouble, it had a single point of contact, a single bond issuer, and a single guarantor to deal with.
The complexity of the bond-issuing process demanded considerable legal expertise – the kind that Allianz Trade has in house at both an international and local level. The legal team at Allianz Trade was also on hand to structure and issue the bond in a tight timeframe of just four weeks, while responding to surety contract negotiations and other developments.
International reach and local insight
International reach, coupled with local expertise, was also hugely beneficial for Allianz Trade’s client in several other areas. Critically, the bond had to be issued directly in Brazil, which presented some unforeseen challenges.
Unlike in the client’s home market of Europe, Brazil operates separate legal frameworks for banking and sureties. The result is that existing texts typically used by banks in this situation are not directly applicable to a surety bond. Having a surety team available from Allianz Trade in Brazil, able to work across those two frameworks, was invaluable for the client.
That local team was also on hand to advise on re-negotiating key aspects of the bond that were seen as over-favoring the interests of the Brazilian project owner. In fact, without the support of the Allianz Trade team, the contract might have never been signed, as some of those conditions would have been a red flag for any surety provider – or, indeed, any bank.
Cost advantages of sureties
The local capability also meant a lower cost structure than might have been available if the client had opted for a bank guarantee.
Although the client had partnered with Allianz Trade on other surety bonds in Europe, it had only previously supported its international projects with bank guarantees. In this case, however, by choosing a surety company with the capacity to issue bonds directly in Brazil, it saw the opportunity to avoid some significant charges. In particular, the ‘fronting fee’ that is typically charged by a local intermediary to issue a bond was handled as an internal transaction by Allianz Trade and amounted to little more than an administration charge.
But there was another financial reason it opted for an insurer-backed surety bond: freed-up liquidity. By not using a bank facility for the guarantee, the company’s credit lines with its bank were not stretched, giving the company the freedom to use working capital to pursue further international projects – where surety bonds are again likely to play a role.
Broad applicability
The advantages that Allianz Trade delivered in this case are widely applicable across all kinds of industries and on all kinds of major projects, both internationally and domestically. Those capabilities include:
• Support for large bond demands
• Legal teams on hand to support clients and structure deals across risk-sharing financial partners
• International reach that supports clients’ global activities and bond requirements
• Local surety and market expertise
• An ability to issue bonds directly within countries
• Efficient structures and processes that reduce client fees
While this case involved a performance bond, Allianz Trade provides surety bonds that support all other project stages, including construction bonds, bid bonds, tender bonds, advance payment bonds, warranty bonds and maintenance bonds.
