Securing contractual obligations with performance bonds

Companies in almost every industry have been relying on bonds for centuries. Used as tools to secure contracts, there are many types of bonds available – each with their own benefits. Performance bonds, thanks to the complete protection and reassurance they offer, are one of the most frequently issued type of bond.

As Allianz Trade’s Global Surety Legal Coordinator, these bonds are part of my expertise. Below, I explore their basic features, and the benefits of choosing an insurance company as a bond provider. I also look at market changes, and why it’s essential that bond providers constantly adapt to meet evolving client needs.

A performance bond, which can be either conditional or unconditional, is a form of security usually issued by a bank or insurance company, guaranteeing a contractor’s obligations towards the employer.

Conditional performance bonds stipulate that the guarantor will pay the bond amount to the employer provided that certain conditions are fulfilled. They are strongly linked to the actual performance of the underlying project. To receive a payout, the employer as beneficiary must prove that the contractor is in breach of contract and that they have sustained a loss.

If unconditional bonds – which most commonly appear as guarantees – have been issued, however, usually no conditions need to be met for the beneficiary to claim their money. In other words, they are, typically, abstract and independent from the underlying contract. It should be noted, though, that occasionally mixed forms - hybrid guarantees with certain conditions - do exist.

It is the underlying contract of the project or transaction that determines the details of the bond or guarantee required. It is, therefore, subject to negotiation between the involved parties. Ultimately, the guarantor has little say in it

In recent years, insurers have come to play a bigger role in the traditionally bank-dominated bond market. Businesses are increasingly seeing insurers as an attractive complement to these institutions, and a good way to increase their potential sources of finance and liquidity.

When a bank issues a bond, the amount will be locked in the credit facilities; but when a company takes a bond with an insurer, their bank-based credit potential remains untouched. By working in partnership with banks, we are enabling clients to broaden their financing sources and ensure they receive the benefits of, and support from, both.

For over 100 years, Allianz Trade has been committed to providing outstanding bonding and guarantee solutions that help clients build strong, sustainable businesses. We must, therefore, constantly develop our capabilities to meet new market and client demands. For example, our clients are under pressure to become more efficient and utilize more tech solutions in their internal processes. As such, we released e-bonds, and are working on digital platform connectivity solutions.

Additionally, our leading global network offers clients myriad opportunities. We can place bonds nearly anywhere in the world, drawing on both our global presence and our local teams with region-specific knowledge. As the world changes, Allianz Trade will continue to grow its offer to ensure clients access the products they need to succeed.