Opening up new business frontiers with surety bonds

The global trade and projects environment has rarely been more volatile and challenging.

Companies undertaking major projects both internationally and in home markets are seeing their execution frustrated, interrupted or even halted by supply chain issues, ongoing Covid-19 disruption, labor shortages, rampant inflation, embargoes, market restrictions and much more.

Despite these challenges, contractors and exporters across the world are still full of ambition for international expansion something that is evident in the latest Allianz Trade Global Trade Survey. The research, involving 3,000 businesses across the US, China and major European economies, shows that the vast majority were expecting to expand into new markets by the end of 2022, with ambition running highest in China (92% of companies) and the US (84%). And even when asked to reassess their outlook in light of the conflict in Ukraine, between 71% and 84% of those surveyed in Europe said they expected to see growth in their international activities during the year.

More than ever, though, projects in international locations need to be backed by guarantees or bonds that instill high levels of confidence in your business’s ability to deliver on its contract obligations. That is especially true for complex projects in areas such as construction, engineering and transportation, where commitments might run for multiple years, span several borders and involve execution in territories where the legal and market frameworks are unfamiliar to you and your team.

Many companies have traditionally looked to their bank to provide these kinds of guarantees. However, an increasingly large number now see major competitive advantages in supporting their projects with surety bonds issued by an insurer.

Just like a bank guarantee, a surety bond financially protects the project owner you’re working with against any loss due to a late or incomplete delivery on your part. And increasingly such a financial solution is becoming not just valuable but mandatory for participation in many projects. That shows in the global demand for surety bonds, which is predicted to rise at a compound annual growth rate of 6.4% over the next five years to hit US$25 billion in 2027, according to The Insight Partners: Surety Market Forecast to 2027 .

Surety bonds are not a single product. There are many variations that project owners require to mitigate their exposure to operational and financial risk, and those typically map onto the different phases of contract delivery. Bid, advance payment, performance, warranty and maintenance bonds are the most common, while license/permit bonds are more common in services contracts, and customs bonds a feature of traded goods.

The growing attraction of surety bonds is perhaps best explained by the business advantages that they deliver over other types of guarantees something that is especially evident in the buoyant construction sector.

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Competitive edge of surety bonds

“The biggest driver of growth in surety bonds today is the boom in infrastructure projects,” says Soenke Schottmayer, Global Head of Commercial Surety at Allianz Trade.

“From the US to the UK, from Germany to China, there are huge infrastructure programs underway, many driven by largescale government investment.” The US’s Infrastructure Investment and Jobs Act, a program priced at $1.2 trillion, is just one example that encompasses roads, bridges, transportation, broadband, utilities and energy projects, among other areas. Another, on an even grander scale, is China’s ongoing Belt and Road Initiative, which is building multiple infrastructure corridors across different parts of Asia, Europe and Africa.

Soenke Schottmayer, Global Head of Commercial Surety at Allianz Trade

“Whatever the scale, almost every company involved in construction projects is required to support their involvement with a bond or guarantee,” says Schottmayer. And for CFOs, treasurers and company owners, selecting the right financial instrument to support this kind of project work requires some careful considerations.

Liquidity is one key factor. All businesses thrive on cash flow, and surety bonds preserve liquidity. “By working with a surety company to support your project with a bond, you are effectively extending your liquidity. That’s because it frees up a line of credit with your bank that you would otherwise have to use for a bank guarantee. That means you can employ your untapped bank lines of credit for loans on new projects, investment opportunities or to meet ongoing payment obligations,” highlights Schottmayer.

International reach

Working with a major insurance company has further advantages. While there are more than a thousand companies around the globe offering surety products, many focus on local or regional markets. If your company is involved in projects outside of its home territory, it is important to work with a partner that can serve your project needs in those countries, with experts – namely underwriters, legal teams and market analysts – on the ground ready to provide guidance and insight.

Why is that critical? “When you’re supporting a project in a foreign country, there is always a significant legal element involved in the issuing of bonds or guarantees. Not only will all the documentation be in the local language, but it’s highly valuable to have a partner on hand who really understands the nuances of local legislation,” says Schottmayer. With more than 230 surety experts in place in different countries around the world, that’s one area where Allianz Trade can add significant value and support clients as they navigate the uncertain waters of foreign expansion, he adds.

For example, teams can take a view and advise on whether the conditions set by a bond are market/country practice (and so are of no disadvantage for you), or if the bond terms present onerous obligations or risk factors that might be better renegotiated with the project owner. That is especially important for mid-sized companies who might not have the expertise in-house or knowledge of a new territory they are expanding into.

From big to small

As that highlights, surety bonds are available for companies of all sizes. Indeed, the scope of Allianz Trade’s surety bond activity currently ranges from a $2 billion facility for its largest multinational client right through to a modest €5,000 surety bond for a small but fast-growing company in Germany. That reflects the situation in its larger markets – such as France and Germany – where Allianz Trade can serve smaller and mid-sized companies efficiently, often with agents and brokers able to issue bonds rapidly and automatically.

“When a facility is in place with the client and the request is for a standard bond, we can issue a bond in a matter of seconds (as an e-bond),” says Schottmayer. In comparison, when Allianz Trade is supporting a large project, the pace is more commonly set by the scope and complexity of the negotiations, with the issuing of the bond aligned to the contract award a timing that might be a few months on from the initial bond request.

Seeing stars

To establish confidence in your company’s ability to fulfil all its obligations on a major project, it’s important for the project owner to know that the third party behind your bond is itself financially robust.

As surety providers, insurance companies typically have higher credit ratings than other financial services organizations. And that matters to your customer. “In a lot of contracts, there’s also a minimum credit rating specified for the guarantor,” outlines Schottmayer. “In fact, in some regions it is common for a project owner to require an investment-grade rating for the guarantor in order to have your bond accepted and therefore your participation in the contract.” When a surety company such as Allianz Trade has the top credit rating of AA, it typically eliminates any need for discussion around the quality of the guarantor, he adds.

Surety without friction

In the current economic and geopolitical climate, project owners are seeking greater certainty. They are only too aware that the economic and environment makes the fulfilment of contract obligations challenging.

International projects are challenging enough operationally. So, when lining up a surety bond to support those, you need a partner who understands the nuances of local contracts, the legal framework and market environment. With the right kind of support, the safety net that you are providing for your client can be put in place with the least possible friction and the greatest possible business benefit.

Surety bonds from Allianz Trade

At Allianz Trade, our strong reputation and solid credit rating means we stand behind your contractual obligations. We find that companies who use our surety bond service see competitive edge through the extra confidence it provides both to you and your project partner. Our industry expertise, combined with local and international knowledge, allows us to provide unique insight into the surety environment and meet clients’ needs. Every year, our 230+ experts around the world provide surety facilities worth around €60 billion to 16,500 clients.

For your customer, that means contractual performance is secured by a guarantor with a strong investment rating.
For your company, the bonds are tailored to fit your exact situation and our local and intentional experts ensure the terms you sign up to are fair and cost-efficient for both you and your customer.

How surety bonds and guarantees can support your business’s growth ambitions

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