CONTACT US
Search
CONTACT US

Energy On-Demand Payment Bonds (ODP)

What are on-demand payment bonds?

Euler Hermes 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
Download the White Paper

Types of on-demand payment bonds

Independent System Operators (ISO) Payment Bonds

ODPs work for obligations under standard ISO operating agreements and collateral obligations related to ISO auctions. An ISO member can build a bonding facility with Euler Hermes to support its bidding strategies and utilize the bond as a principal when they are required to post collateral.

Euler Hermes supports two type of ISO on-demand payment bonds; ISO Standard Operating Agreement and ISO/Assurance Auctions (subject to acceptance by each ISO).

Download the ISO Flyer

Commodity Supply Payment Bonds

ODPs work for payment obligations under industry standard commodity supply contracts for spot or term transactions (crude, natural gas, power, refined products),as well as for custom negotiated commodity transactions. The counterparties can agree to use a bond and the principal can post a bond to the obligee when they are required to post collateral and/or are short credit.
Download the Commodity Supply Flyer

Pipeline and Processing Payment Bonds

ODPs work for all obligations under standard short- or long-term pipeline construction/precedent agreements, pipeline transportation agreements, and commodity processing agreements. The shipper or producer utilizes the bond as a principal when they are required to post collateral.

Euler Hermes supports three kinds of pipeline and processing payment bonds; Pipeline Precedent Agreements, Pipeline Transportation Agreements, and Commodity Processing Agreements.

Download the Pricing and Pipeline Flyer

Letters of Credit & On Demand Payment Bonds frequently asked questions

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, Euler’s 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.

Fronted Letters of Credit Questions

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 Euler Hermes providing a guarantee to the bank. Euler Hermes 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. 

 

Related resources

Liquidity Management: Credit on the Offense

Liquidity Management: Credit on the Offense [White Paper]

Interested in new tools to create a positive effect for your market liquidity and margins?

Euler Hermes Energy offers two forms of alternative methods for credit management: Energy Credit Insurance and On-Demand Payment Bonds. Read the white paper to learn about these important liquidity tools.

Request more information about our ODP bonds

Please fill out this short form and we will be in touch.


At Euler Hermes 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.

​ ​
​ ​

Related Products

Energy

Euler Hermes Energy provides a suite of resources specifically designed to empower commercial traders and risk managers to gain market share while minimizing credit exposure.

Learn more

Energy Credit Insurance

Energy trade credit insurance provides liquidity for wholesale commodity transactions by clearing credit and helps energy businesses mitigate risks and maximize opportunities.Learn more

Non-Cancellable

Protect your client from large, unexpected losses and provide assurance that the protection will not be withdrawn. Check out Euler Hermes non-cancellable insurance policies here.

Learn more

Surety


Provide security with commercial surety bonds and contract surety bonds for your upcoming construction or manufacturing project.

Learn More

 

Video cannot be shown without accepting cookies