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How surety bonds freed capital for mining services business to expand

Published 19 July 2022

Accessing finance to enable further growth while maintaining operational liquidity can be a hurdle for businesses in pursuing their ambitions. In this client case study a Western Australia-based mining engineering services company partnered by our Gallagher team was able to reposition the business for overseas expansion and pursue their goal of becoming “a world class engineering company”.                                                  
The client, a mining engineering business, manufactures and maintains large open cut mine bodies, underground dump bodies and mining buckets – providing services to leading Australian and overseas mining companies, and was seeking a surety facility for the business. 

 

 

How surety bonds provide an ‘insurance’ guarantee on the delivery of contracted services

For businesses offering contracted services, effectively balancing short and long term costs against income is a necessity for project profitability. When businesses are required to provide financial assurance around their performance obligations under a contract, a surety bond is an acceptable form of security for the majority of Principals. A surety bond is an unconditional, on demand instrument which makes it comparable to a bank guarantee.  Unlike bank guarantees, however, the sureties do not take security over tangible assets or tie up valuable working capital of the business.   

The surety program provided in this case had to satisfy the business’s contract security obligations to their tier 1 customers operating large, long life mines. It also needed to provide the benefit of freeing up working capital previously committed to the business’s bank guarantee facility. 

"The advantage of surety bonds is that they operate exactly the same way as a bank guarantee facility, offering an unconditional and on-demand instrument," Gallagher National Head of Trade Credit, Surety & Political Risks in Australia, Racheal Tumelty says.

"The fundamental difference is that bond issuers don’t require cash backing or any other tangible security, unlike banks which may require up to 100% cash collateral to issue a bank guarantee or take a general security agreement (GSA) over the business or other tangible property assets."

Surety bond providers in Australia have to be approved by the Australian Prudential Regulation Authority (APRA) and range from Standard & Poor’s (S&P) A to AA+ rated, so from a financial strength perspective they are comparable to the major banks.
 

How the Gallagher team was able to further release the client’s working capital

In the course of working on the surety program the Gallagher team also discovered that the company held multiple property leases which required bank guarantees as security. By facilitating discussions between the business’s many landlords and the leading lease bond security provider in the market the Gallagher team was able to convince them to accept lease bonds instead of bank guarantees. This delivered further capital for the business to act on its growth ambitions.

The parent company’s management was impressed by this practical demonstration of the value proposition the Gallagher team could offer and as a result appointed Gallagher to place and service their overarching surety program. 


Interested in finding out more about obtaining surety bonds?

We have the expertise and relationships with surety bond providers to support business that are seeking an alternative to bank guarantees and retention monies, both of which tie up working capital.
 

Further reading

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Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.
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