Commercial bonds ensure good things happen
One of the most famous lines in film is, “My name is Bond. James Bond.” Audiences accustomed to seeing the stylish spy dashing in to save the day might be surprised to discover there’s another hero with same surname: Bond, Commercial Bond.
Many insurance products offer mitigation and protection against negative events that can happen. James Bond has made his reputation foiling plots that threaten individuals and governments. Ensuring that something good happens, however, takes a different sort of talent, and that’s where Commercial Bond comes to the rescue.
Commercial bonds operate on a simple principle: A bond from the bonding company, also known as a surety, guarantees that financial, judicial, contractual and other obligations are met.
Because virtually every vendor, supplier and applicant faces some form of obligation in public- and private-sector transactions, bonds come in many forms and apply to a wide variety of situations. AXA XL, for example, offers bonds including: customs, license and permit, lost instrument, court bonds such as appeal bonds, performance and payment for service providers, supply, workers compensation and large deductible surety bonds.
Entities ranging from nonprofits to government entities, and midsize businesses to multinational corporations, can use bonds to meet financial and performance requirements. Major advantages of commercial bonds include enabling principal (the party assuming obligations under the project / supply obligation) to negotiate more favorable terms and free up capital. Without the benefit of a commercial bond, a principal could have little to no leverage against onerous project terms and security requirements.
Here’s a fictional but realistic example of how that works: Skyfall Commercial is a technology consulting firm in an IT enhancement project for Goldfinger Corp. In addition to completing the project on time and on budget, Skyfall is required to post a letter of credit (LOC) to guarantee this. Its contract with Goldfinger specifies bankruptcy as a cause of default. A commercial bond not only can replace the LOC, which is difficult to obtain in a tight credit market, but the bond also offers options for curing defaults under the contract. The bond provides assurance to the beneficiary of the bond and can allow Skyfall to remove bankruptcy as a cause of default — mitigating risk for both parties in the contract.
" Major advantages of commercial bonds include enabling principal (the party assuming obligations under the project / supply obligation) to negotiate more favorable terms and free up capital.
The bonding company can help break down projects into phases to make the performance / supply guarantee more manageable in terms of size, scope and tenor for both the customer and the bonding company, still providing adequate security to the beneficiary. This can allow for partial releases under the bond as project milestones are met. The bonding company can also help negotiate grace periods with the beneficiary of the bond.
Some guarantees may require to be paid on demand or have forfeiture language in them (i.e. in the event of default, the whole bond amount becomes due, not just the portion of the contract not being performed). Commercial Bonds at AXA XL can help negotiate removal of forfeiture language, conditionality and securing an acceptable timeline for notification to cure the default before the bond can be called.
Other guarantees may have automatic escalation clauses that increase the guarantee amount by a certain percentage every year. The bonding company can help the customer negotiate whether the increases are needed every year and / or get notified before an increase is required.
LOCs and other forms of security, such as cash deposits, lock up capital that organizations can otherwise use to enhance their operations or invest in growth opportunities. A bond reduces the cost of capital and can replace LOCs and other assets because the surety promises its financial strength to back the obligor.
Other situations in which a bond can replace required security include:
- Judicial bonds to meet court requirements in cases such as injunctions. A bond can guarantee that a plaintiff will indemnify a defendant if the injunction is found to have wrongfully restrained the defendant.
- Appeal bonds, which guarantee the availability of funds to pay for settlements.
- Workers compensation and insurance program bonds, to meet collateral requirements in paid-loss retrospectively rated, large-deductible or self-insured programs.
- Performance guarantees for service providers can be issued for multiyear periods and are renewable. These are particularly valuable for entities delivering ongoing services.
- License and permit bonds, which guarantee a service provider will comply with applicable regulations and laws. These bonds also can guarantee indemnity payments for third-party injuries. A common example is a company with a permit to hang signs or complete other work in areas frequented by the public.
Risks, like villains in the James Bond movies, come in many forms. Fortunately, the commercial bond universe is diverse and able to respond to an array of risks. Whether shaken or stirred, commercial bonds’ flexibility offers valuable protection for organizations of all sizes.
For more information on commercial bonds, visit axaxl.com.
About the Author
Maria Duhart is Head of Commercial Bonds in AXA XL’s Political Risk, Credit & Bond division. She has more than 20 years of experience in insurance, business strategy and finance. Before joining XL Catlin in 2017, Duhart held various leadership roles in commercial surety. She studied economics at the Catholic University of Argentina, completed a certificate in administration and management at Harvard University and holds a Master of Business Administration degree in strategy and finance from New York University’s Stern School of Business. She is a Chartered Financial Analyst.