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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).
