INFORMED DECISIONS SURETY BONDS OR BANK LETTERS OF CREDIT 2013.

INFORMED DECISIONSSURETY BONDSOR BANK LETTERSOF CREDIT

2013

What Is A Surety Bond?

Underwriter

Producer

Contractor

Three Types of Bonds

BidPerformancePayment

What Are Bank Letters of Credit?

Cash guarantee to ownerCalled on demandPayment to owner & loan for

contractorNo guarantee of project

completion Irrevocable

Prequalification

Surety BondsCapitalCapacityCharacter

Letters of Credit

Single focus Quality & liquidity of collateral

Borrowing Capacity

Surety Bonds Issued on

unsecured basisDoes not diminish

borrowing capacity

Credit enhancement

Letters of Credit Assets used as

collateral Diminish existing

line of credit Can affect cash

flow

Duration

Surety BondsDuration of

contractMaintenance

period

Letters of Credit

Date specific“Evergreen”

clauses

How to Obtain

Surety Bonds Issued

through surety bond producers

Letters of Credit

Issued through banking or lending institution

Cost

Surety Bonds0.5%-2% of

contract price Includes

performance, payment & warranty

Letters of Credit

1% of contract amount covered by LOC times number of years of contract

Coverage

Surety Bonds 100%

performance 100%

payment 100%

warranty (typical)

Letters of Credit

Typically 10% of contract

No protection for unpaid subs

Claims

Surety Bonds Surety

investigates claim of default

Surety’s options Surety pays

rightful claims of certain parties

Claims

Surety Bonds Surety

investigates claim of default

Surety’s options Surety pays

rightful claims of certain parties

Letters of Credit Payable on

demand Owner

determines validity of claims by subs & suppliers

Conclusion

Informed decisions on risk management

For More Information

Surety Information Office (SIO)www.sio.org | [email protected]

SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond

Producers (NASBP).