By Mary Castiglia, Hub International
TO COMPLY WITH POST CLOSURE ACTIVITIES, FUNDS NEEDED TO BE AVAILABLE – LETTER OF CREDIT OPTION:
Landlords and regulatory agencies, representing the public, need to make sure there is funding to pay for post closure activities for used electronics processing companies that have ceased operations. To this end, financial guarantees are needed and often the instrument used for this guarantee is a cash deposit or Letter of Credit from a bank or financial institution. These funds can then pay for post closure activities if a company does not fulfill its post closure obligations.
A letter of credit is a document from a bank or financial institution guaranteeing funds to another party – in this case it would be the landlord or governmental agency. For a bank to issue the letter of credit, a cash deposit is often required and there is a fee for issuance.
LETTER OF CREDITS – REQUIRE COLLATERAL – CAN TIE UP CASH FLOW:
Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. The requirement to post collateral can tie up a used electronics processing company’s working capital – and hamper operations and growth of the company. Additionally, there is typically a fee to issue the letter of credit, and the cost associated, depending on the amount, can be high. The bank charges the buyer a fee for issuing a letter of credit (often around 0.75% to 1.5% of the amount of the deal). Issue -ties up credit.
TO FREE UP CASH / BANKING LINE OF CREDIT – AN OPTION FOR POST CLOSURE BOND SHOULD BE CONSIDERED:
Used electronics processing companies can often shift the Letter of Credit instrument to a Post Closure Bond which would replace the need for Letter of Credit. This can be an alternative for some companies to consider.
WHAT IS A CLOSURE BOND:
A closure bond for pollution exposure is a specific type of surety bond used to ensure that the costs associated with closing and post-closing care of facilities that handle hazardous waste are covered. These bonds are required by regulations such as the Resource Conservation and Recovery Act (RCRA) to provide financial assurance that the facility will be properly closed and any pollution will be managed, even if the facility operator does not meet their obligations.
A Post Closure Bond guarantees that if the operator does not meet its obligations, the surety (the party backing the bond) will either perform the required closure and post-closure activities or pay the necessary costs into a standby trust fund.
HOW A SURETY BOND WORKS:
Basically, surety bonds legally promise someone that the principal will perform a task or complete a job lawfully.
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Principal: The party who needs the bond, usually needs to obtain the bond to guarantee their obligations. (The company)
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Obligee: The party who needs the bond, (landlord, government entity)
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Surety: The party that backs the bond, guaranteeing to the obligee that the principal will fulfill their obligations. (Surety/bonding insurance company)
Important to note, that as part of the underwriting and bonding process, the surety company requires indemnification agreements to be executed. Depending on the financial situation and experience of a particular company, there may be both corporate indemnification and Personal indemnification required.
If the surety company pays out a claim on the bond to the principal or fulfills the obligation, the surety company will seek reimbursement from the company and/or its Principals under the indemnification agreement.
HOW MUCH DOES A CLOSURE BOND COST:
One of the key benefits of securing a Post Closure Bond as compared to a Letter of Credit – is that it can free up cash flow for anused electronics processing company – rather than using funds that are set aside as collateral for the Letter of Credit.
There is cost to the bond with a premium rate of typically 1-3% of the bond amount. For a $100,000 bond, the annual premium cost would range from $1000-$3000. This cost may be slightly more than the cost of a Letter of Credit – however, the bond instrument could allow for better working capital.
HOW TO SECURE A BOND:
The underwriting process for a post closure bond in some ways resembles securing a mortgage. The surety underwriter assessment of the location and the operations and financial condition of the company.
In order to apply for a surety bond, the underwriting process will evaluate the used electronics processing operator's location, its proximity of runoff to nearby watersheds, ownership and operators business and personal financial stability, resumes of employees of the company, and operational plans including potential expansion and post closure considerations. The timeframe to review and secure bond options is 1-2 weeks.
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