Beyond banks: surety bonds as an alternative to bank guarantees

When needing financial support, the majority of companies turn to banks. And with good reason: in most countries, banks are a reliable first destination for companies seeking guarantees or bonds.

However, when financing options become more expensive and margins get tighter, alternative financial providers may be a solution for sectors looking for more flexibility than traditional banks can offer. The machinery and construction sectors have seen significant changes since the onset of Covid-19, creating a need for different financing options. Here, our experts from the Allianz Trade Surety team share their insights on how companies can use surety bonds to finance and win projects in these sectors.

Although the pandemic impacted some countries less than others, common themes emerged and continue to have an impact. Tim Möllmann, Head of Surety & Mid-Term at Allianz Trade in Switzerland says, “The machinery sector is dependent on train construction companies, especially on the export side. In terms of insolvencies, it was hit hard by lockdowns and the overall dependency on the automotive sector.”

“Between projects that were stalled, stopped or outright cancelled, there are significant lags and delays in construction,” says Sylvain Nalies, Bonding KA Manager, Allianz Trade in France. This has created a backlog of construction work.

When it comes to the construction industry, “Australia was quite fortunate overall during Covid-19,” says Guilherme Henrich, Senior Surety Underwriter in Australia. “Nevertheless, we’re seeing lower margins due to increased cost of resources and supply chain pressures. In turn, that leads to higher competition to bid for fewer new projects and contracts in general.”

Turkey is home to the world’s second-largest construction sector in terms of the number of the international construction companies after China, but insurance companies such as surety and guarantee providers, are largely an unknown there. “The construction sector uses all types of bonds for both national and international markets,” says Fatih Bas, Head of Bonding Allianz Trade in Turkey.­ “99% are issued by the banks, but we offer essentially the same thing as a bank, with a few advantages. We support companies in securing international products or projects. This becomes much easier considering the high grade of Allianz Trade and its much lower costs thanks to business units around the world. This is especially helpful when a fronting partner is needed,” he explains.

Sylvain adds: “The process and policies of issuing bonds are exactly the same whether you use a bank or surety.”

If the process for issuing bonds is the same, what’s the difference between receiving a bond from a bank and an insurance provider? According to Sylvain, the answer is straightforward. “Banks do not only provide bonds; they offer the full variety of financial products whereas  surety focuses on bonds. The benefit is that taking out surety bonds frees up banking capacity,” he says. “So, this means companies are able to increase their financing capabilities and meet their short-term cash flow needs, which become less expensive.”

According to Guilherme, the main advantages of using surety bonds instead of bank guarantees are the same across most parts of the world. “Bond facilities are unsecured, whereas the banks’ secured positions lock up assets. This means surety bonds usually do not lock up the company’s assets and provide credit flexibility. With surety bonds, companies do not need to use banking lines for contingency liability purposes, and this improves their liquidity.

Companies should look for surety bond brokers or guarantee providers that can meet their project’s specific needs. Banks are a reliable source for traditional loans, but surety bonds from insurance providers enable more cash flow and flexibility. For those looking to mitigate tight margins while competing for fewer projects, they may want to consider alternative sources for their funding and bonds. Allianz Trade supports companies in the construction and machinery sectors around the world.