The Bond Behind the Curtain: Bank Fronting Surety

By Elizabeth Cervini
Director of Surety Operations

By James DiSciullo
Vice President

Expanding banking relationships, minimizing debt, strengthening cash flow, liquidity, the overall balance sheet, etc. etc. These are the concerns you hear day in, and day out from your treasury departments. We know; we have these discussions daily. 


While there are no actual wizards of Oz to be found in our nonfictional world, we at R&P have been working to develop options to benefit our clients when surety isn’t acceptable, or when its acceptance is limited. As you read this, you may be thinking, “But all R&P does is surety – the tagline is, after all, ‘pure surety’ … so if surety isn’t accepted, what can they actually do?” – The answer is in a relatively new product in the industry. Bank fronted surety has only really been utilized in the past few years for more than simple assurances on things like insurance deductibles. It can be a worthy addition to the toolbox for your treasury’s ongoing liquidity strategy.


It’s no secret that we here at R&P have a strong affinity for the traditional use of bonds, but, with great vigor, we are looking to keep the industry moving forward to match our clients’ needs. Facilitating solutions to save money and free up borrowing capacity stood out to us as the best place to focus our efforts while we help to develop this product in the industry. 


Bank fronted surety maintains the benefits of a traditional surety bond (like keeping the credit extension in your footnotes of the statements, not on the balance sheet), while leaving your already established banking relationships open for other collateral or borrowing requirements.


Surety traditionally is a three-party agreement: principal, oblige, surety. With this product, we add just one more domino in the line-up: the bank. The end product is a letter of credit issued with a banking partner written with your name as obligor/principal and written to the beneficiary/obligee as required. What your beneficiary has is a traditional letter of credit. Pulling back the curtain, what the issuing bank has is a guarantee from your surety partner, who in turn has a guarantee (indemnity) from you as their bonded principal. Your obligee is none-the-wiser as to who is guaranteeing the letter of credit. This is a way to keep the credit extension off your balance sheet, without impact to your existing banking facilities and often saving money in premiums and fees.


We, at R&P, are providing the figurative ruby slippers that your treasury folks will appreciate by way of facilitating relationships between our surety partners and our banking contacts to expand this product. We have found it particularly useful in support of ISO obligations in the energy market. We understand ISOs often set capacity limitations of standard surety bonds lower than what they set for the banks from which they receive letters of credit. So, our initial efforts in progressing this product focused here and have proven highly successful. Now, we are actively pursuing more diverse scenarios to implement the product. 


As a new product blurring the lines between risk management and treasury, there are a few things that are worth noting. Sureties still typically invoice these as traditional bonds – so be prepared to absorb the premium for the first year’s term, rather than paying incrementally throughout the year as is traditional for LC fees. The product is also not meant for all credits. Some credits are too high that the cost efficacy of the product is eliminated, while others will have credit profiles too low for the surety and bank to come to an agreement to support these as they are financial guarantees, with no rights or means to remedy. However, they do play a role when your credit profile is there in the sweet spot. 


If you’re looking for more particulars or to see if this can help, please reach out and we’ll see whether this can be a benefit to your group.