Right at the tail end of the year, Mr Kladívko’s company won a client in Kazakhstan (a state-owned construction company), which was willing to sign an exceptionally large contract for the supply of nails and other materials worth 50 million crowns. The customer has been allocated funds from the central government’s budget for this contract and needs to spend part of this appropriation by the end of the year. Consequently, it is offering Mr Kladívko a 30% payment upfront (i.e. CZK 15 million) prior to the actual supply. In return, the Kazakh company requires a bank guarantee that the upfront payment will be refunded if the supply of nails does not subsequently go ahead. In this situation, Mr Kladívko needs his bank to provide a down-payment bank guarantee for CZK 15 million, which is covered by EGAP. Following an analysis, a three-party insurance contract is signed between Mr Kladívko, the bank and EGAP. Mr Kladívko has his financial director draw up a budget for the use of the nail production down payment. If Mr Kladívko exports the goods in a due and timely manner, the bank guarantee and insurance will end. If he is unable to make a delivery properly (or if, for instance, insolvency proceedings are brought against him), the state-run Kazakh company may invoke the guarantee, requiring the bank to refund the down payment to it. EGAP then pays the money to the bank.
The bank guarantee is bank's obligation to satisfy the beneficiary (entitled entity) up to a certain financial amount depending on the contents and conditions of guarantee. The beneficiary may be the importer or importer's bank.
The bank guarantee shall be issued by the bank based on exporter's (mandator's) request in view of the conditions of concluded export contract or announced tender. Most frequently, the banks issue guarantees for Czech exporter's bid (Bid Bond), for returning the advance payment by importer (Advance Payment Bond) and for the proper performance of export contract (Performance Bond). Also other types of guarantees may be issued in connection with conditions of acquiring or performing export contracts. The bank is insured hereby against the risk of unauthorised and optionally also authorised drawing from the guarantee by the beneficiary, to the benefit of which the guarantee is issued.
Ing. Petr Martásek, Director of Export Credit and Investment Insurance Department
+420 222 842 340
+420 222 844 130