Lessons · Lesson 6 of 7
- 01 · The bank does not check whether you failed
- 02 · Four instruments on one contract, and what each one secures
- 03 · The demand: what it must say, and how fast the money goes
- 04 · Standby credits, and choosing between the two shapes
- 05 · The call nobody was wrong to make
- 06 · Expiry is the only thing that reliably protects you
- 07 · The drafting that costs nothing at the time
Expiry is the only thing that reliably protects you
Price the whole bond package on one contract, and see what an instrument with no expiry date costs every year after the risk it secured has ended.
Lesson 6 of 7 · 16 min
The instrument that is still alive
1 March 2029. Zawya's finance director is reviewing the facility. Contract KSR/UNI/271 finished delivering in September 2027. The warranty period ended on 30 September 2028. And guarantee CCB/G/27-0219, for USD 99,200, is still outstanding.
Its expiry clause reads: this guarantee shall remain valid until the Employer certifies expiry of the warranty period. There is no date in it. The certificate is a one-page form. The manager who signs it moved department in November 2028. And nobody at KSR is doing anything wrong by not signing a form nobody has asked them for.
Corniche cannot release it. The bank's obligation runs to KSR, and only three things end it: the beneficiary releasing it, expiry, or a court. There is no expiry. So the meter runs.
- Commission for the two quarters since the warranty ended: USD 793.60.
- Blocked cash cost over the same five months: USD 1,426.00.
- USD 2,219.60 so far, and USD 5,009.60 for every further year, on an instrument securing an obligation that no longer exists.
Nothing has gone wrong. That is what makes it the most common expensive mistake in this whole subject. An open-ended instrument does not fail. It just never stops.
What the whole package cost
Corniche's terms for Zawya, agreed in December 2026, were these. An issuance commission of 1.6% a year on the face, charged quarterly in advance, with a minimum of USD 250 per instrument per quarter. A 30% cash margin, blocked and earning nothing, set at that level because Zawya had no track record on state contracts. And USD 180 per instrument in issuance and message charges. Blocked cash is costed at Zawya's own working-capital rate of 11.5%. Every one of those numbers is Corniche's, on Zawya's file, in 2027. Ask your bank for its own.
| Instrument | Commission | Cost of blocked cash | Total |
|---|---|---|---|
| Tender bond | 500.00 | 570.40 | 1,070.40 |
| Advance payment guarantee | 5,952.00 | 12,834.00 | 18,786.00 |
| Performance bond | 3,968.00 | 7,843.00 | 11,811.00 |
| Retention guarantee | 1,587.20 | 3,422.40 | 5,009.60 |
| Issuance and message charges | 720.00 | — | 720.00 |
| Total | 12,727.20 | 24,669.80 | 37,397.00 |
USD 37,397.00 is USD 0.60 a jacket, or 1.51% of the contract value. Zawya's tender price carried nothing for it.
Two things in that table are worth stopping on. First, the tender bond's quarterly commission works out at USD 198.40. So the minimum charge bites, and it costs USD 250 a quarter instead. Small instruments are disproportionately expensive, and issuing four small bonds where one would do is a real cost. Second, the cost of blocked cash is nearly twice the commission. A merchandiser who negotiates the commission and accepts the margin has negotiated the smaller half.
Why an unused guarantee is not free to the bank either
It helps to know why the bank charges for something it has not paid out. A guarantee that stands in for a borrowing is treated, for the purposes of the bank's own capital, much as though the money had already been lent. From the bank's point of view it may have to be, at a moment of the beneficiary's choosing. That is why an undrawn instrument consumes a limit and carries a price.
Which makes the limit the thing to watch. Zawya's non-funded facility is USD 3,000,000. At the busiest point of the contract it held USD 744,000 of bonds and a USD 1,240,000 import credit for the suiting, leaving USD 1,016,000. Comfortable.
Now put the zombie retention guarantee back in. In March 2029 Zawya is bidding a similar tender. It will need a tender bond and, if it wins, an advance payment guarantee of the same order as before. USD 99,200 of its limit is occupied by an instrument securing nothing. And a limit increase is a credit application, with a committee and a delay attached. Course 13.4 treats the facility as the scarce resource it is. This is the cheapest way to waste some of it.
Extend or pay
One more thing you will meet. Where an instrument is about to expire and the beneficiary is not satisfied, it may present a demand coupled with an offer: extend the guarantee, or we take the money now.
It is not a bluff, and it is not improper. The beneficiary is entitled to demand before expiry, and it is offering you an alternative to being paid out. But notice what it does. It converts your expiry, the one protection that works without anybody's cooperation, into a negotiation. And it does it at the moment of least leverage.
The honest answers are three, and only three. Extend, and get something for it. Refuse, and expect the demand. Or negotiate a reduced extension. That is often accepted, and it is the answer nobody thinks to ask for, because the exposure at that stage is usually much smaller than the instrument.
Check yourselfA buyer's template gives the performance bond an expiry of thirty days after final acceptance, with no date. Final acceptance is the buyer's own certificate. What do you ask for, and what is your fallback?Show the answer
Ask for a fixed long-stop date: thirty days after final acceptance or a stated date, whichever comes first. Set it generously beyond the real risk period, so the buyer loses nothing. If the buyer will not move, the fallback is a reduction. Agree that the amount falls to a small percentage once delivery is complete. Then an instrument you cannot kill is at least one you are barely paying for. Never accept both an open expiry and a full amount.