What a Counter-Guarantee Is and How It Works

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What Is a Counter-Guarantee? Meaning, Uses and How It Works

A counter-guarantee is a bank's undertaking to a second bank, usually in the beneficiary's country, that lets the second bank issue its own local guarantee to the beneficiary and claim reimbursement if that guarantee is paid.

It is the standard route when a foreign buyer, employer or government will only accept a guarantee from a local bank. The structure is called an indirect guarantee, as opposed to a direct guarantee issued straight to the beneficiary.

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How a counter-guarantee works

How a counter-guarantee connects the applicant, two banks and the beneficiary Applicant's country Beneficiary's country Applicant (contractor, exporter) Beneficiary (buyer, employer) Instructing bank (counter-guarantor) Guarantor bank (local issuing bank)
  1. The applicant applies to its own bank and signs a counter-indemnity.
  2. The instructing bank issues a counter-guarantee to a bank in the beneficiary's country, usually by SWIFT MT760.
  3. The guarantor bank issues its own local guarantee to the beneficiary.
  4. The beneficiary makes a complying demand under the local guarantee and the guarantor bank pays.
  5. The guarantor bank demands payment under the counter-guarantee, stating it has paid or received a complying demand.
  6. The instructing bank pays and debits the applicant under the counter-indemnity.

Common uses

Counter-guarantees back the same instruments as direct guarantees, issued through a local bank. Typical cases are bid bonds for tenders, performance guarantees on EPC and supply contracts, advance payment guarantees, warranty and retention guarantees, and customs or tax guarantees in markets where only domestic banks are accepted.

Rules and wording

Most counter-guarantees are issued subject to URDG 758. Under those rules a demand under the counter-guarantee must be supported by a statement that the guarantor has received a complying demand under its own guarantee. Expiry dates matter too. The counter-guarantee usually runs longer than the local guarantee, so the guarantor bank has time to claim after paying. See how URDG 758 compares with ISP98 and UCP 600.

Cost and timing

The applicant pays two banks, the instructing bank for the counter-guarantee and the local bank for issuing the guarantee, plus SWIFT and legal costs. The local bank also has to accept the instructing bank's credit, so a weak or unknown issuer can mean extra confirmation or cash margin. Where your bank asks for full cash cover, our credit enhancement and SBLC services can help reduce it.

Need a guarantee issued through a local bank?

Send the tender or contract, the guarantee text required, the amount and expiry. Financely is an advisor and arranger, not a bank, and we will set out the bank route and costs.

Frequently asked questions

What is a counter-guarantee?

A counter-guarantee is an undertaking from the applicant's bank to a second bank, usually in the beneficiary's country, so that the second bank issues its own guarantee to the beneficiary. If the second bank pays, it claims reimbursement under the counter-guarantee.

Why would a beneficiary ask for a local guarantee?

Many public buyers and employers only accept guarantees issued by a local bank, under local law and in local currency, which they can call without dealing with a foreign bank.

Which rules govern counter-guarantees?

Most are issued subject to the ICC Uniform Rules for Demand Guarantees, URDG 758, which define the counter-guarantee and require a demand under it to state that the guarantor received a complying demand.

Is a counter-guarantee the same as a counter-indemnity?

No. The counter-guarantee runs between two banks. The counter-indemnity is the applicant's promise to repay its own bank if the counter-guarantee is paid.

Does Financely issue counter-guarantees?

No. Financely is an advisor and arranger. We structure guarantee requests and place them with issuing and local banks, which issue under their own credit approval.

This page is for general information only and does not constitute legal, tax or investment advice. Financely is an advisory and arranging firm, not a bank, lender or broker-dealer. Any guarantee or counter-guarantee is subject to the banks' KYC, credit approval, documentation and fees.

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