Surety Bonds and Replacements of Guarantees
Surety bonds can also be used to replace parent company guarantees covering legacy performance obligations of a target that is being acquired. This is advantageous for a seller as it no longer needs to keep in place a guarantee that relates to business activities that are being divested. A surety bond can also be used to replace existing bank guarantees on more desirable terms. As such, facilities are often a lower cost to bank guarantees and issued on an unsecured basis.
Case Study: Deferred Consideration Surety Bond
Aon supported Warburg Pincus on its USD 700M acquisition of Leumi Card by arranging and placing a landmark surety bond solution to support the deferred consideration payments agreed in the transaction.
Warburg Pincus agreed to acquire Leumi Card from Bank Leumi and Azrieli Group for USD 700M. The deal’s commercial terms included the payment of consideration to the sellers by Warburg Pincus in three instalments: at completion and on the first and second anniversary of completion.
Given the deferred consideration structure, Warburg Pincus sought to optimise the cost of capital Bank Leumi was required to hold, for regulatory capital reasons, against the post-completion credit risk of Warburg Pincus for the deferred consideration period.
An insurance (surety bond) solution enhanced Warburg Pincus’ proposal by arbitraging a lower cost of insurance versus bank capital and accentuating the capital relief available to Bank Leumi given the highly rated insurer covenant (a combination of AA and A).
Aon structured a substantial deferred consideration bond from London with 6 surety providers, navigating the dynamics between the sureties’ commercial and legal requirements for issuing bonds and Warburg Pincus’ fund and deal structure.
Leumi Card’s sellers, as beneficiaries under the deferred consideration bond, are entitled to call it if the deferred consideration payments are not made on the first and second anniversary of completion.
“Aon’s surety solution helped optimise our financial discussions with the Leumi Card sellers. The Aon team worked tirelessly to support us in understanding and addressing the sureties’ requirements within the context of the deal and guided us through the placement process to deliver a tremendous outcome for us.”
Max Fowinkel, Managing Director, Warburg Pincus