Counter-Guarantee Facilities for Cross-Border Contracts

A contractor can have sufficient bank lines, a strong relationship bank and an awarded contract and still be unable to issue the guarantee required by the employer.

The problem is often not the contractor's credit. It is the identity and location of the issuing bank.

Government authorities, national oil companies, utilities, EPC employers and large industrial buyers frequently require bid bonds, performance guarantees, advance-payment guarantees and other contractual undertakings to be issued by a bank operating in the beneficiary's own jurisdiction.

A European contractor may therefore have €100 million of approved guarantee capacity at its home bank but find that the beneficiary in Saudi Arabia, the UAE, Iraq, Nigeria or another market will not accept a direct guarantee from that bank.

This is where a counter-guarantee facility becomes relevant.

The contractor's relationship bank issues a counter-guarantee to an acceptable local bank. The local bank then issues its own guarantee directly to the employer. The local bank faces the beneficiary. The foreign bank faces the local bank. The contractor ultimately reimburses its own bank.

A Real Counter-Guarantee Transaction: Saipem, UniCredit, SACE and Saudi Aramco

Saipem's Berri Increment Programme in Saudi Arabia provides a documented example of how a large counter-guarantee transaction works in practice.

Snamprogetti Saudi Arabia Co Ltd, a Saipem subsidiary, was performing work for Saudi Aramco on the Berri Increment Programme, including facilities connected with the expansion of Abu Ali crude processing and the Khursaniyah Gas Plant.

The contract required an advance-payment guarantee issued locally in Saudi Arabia.

Saipem disclosed that the guarantee had originally been issued for SAR 1 billion, approximately €275 million at the time. In 2022, the required guarantee amount increased to SAR 1.3 billion, approximately €357 million.

The additional SAR 300 million of guarantee capacity was not created by Saudi Aramco simply accepting a foreign guarantee from UniCredit.

UniCredit issued a SAR 300 million counter-guarantee to the local Saudi bank. The counter-guarantee could subsequently increase to as much as SAR 700 million.

A second layer of risk support was then added. SACE issued a counter-guarantee in favor of UniCredit covering 33% of UniCredit's counter-guarantee exposure. That SACE undertaking initially amounted to SAR 99 million and could increase to SAR 231 million.

This is a genuine multi-layer bank guarantee transaction rather than a theoretical structure.

Saudi Aramco received the local guarantee it required. The Saudi bank did not have to rely solely on Saipem's corporate credit because it held UniCredit's counter-guarantee. UniCredit in turn transferred part of its Saipem risk to SACE.

Saipem described first-demand advance guarantees as a normal feature of its engineering, materials-supply and construction activities and characterized the transaction terms as consistent with established domestic and international market practice.

Read Saipem's Annual Report 2022.

Saipem Used the Structure Again on the Marjan Project

The Berri transaction was not an isolated use of counter-guarantee capacity.

Saipem disclosed another counter-guarantee structure for Saudi Aramco's Marjan Package 10 Gas Treatment and Sulfur Recovery project.

A Saudi bank had issued a local advance guarantee for materials in favor of Saudi Aramco and in the interest of Snamprogetti Saudi Arabia.

SACE issued a counter-guarantee to UniCredit covering 50% of the relevant exposure. The SACE counter-guarantee was initially SAR 325 million, approximately €83 million, and was increased in August 2022 to SAR 612.6 million, approximately €157 million.

Saipem again described the first-demand advance guarantee as standard practice in the execution of engineering, material supply and construction contracts.

Two separate Saudi Aramco projects therefore show the same commercial reality: international EPC contractors need substantial contingent banking capacity alongside ordinary working capital and project liquidity. :contentReference[oaicite:0]{index=0}

What Is a Counter-Guarantee?

A counter-guarantee is an independent undertaking issued by one bank in favor of another bank in connection with the second bank's issuance of a separate guarantee.

It is commonly used where the final beneficiary insists on a locally issued guarantee.

The contractor's relationship bank becomes the counter-guarantor. The bank in the beneficiary's country becomes the local guarantor. The project owner receives the local guarantee rather than relying directly on the foreign bank.

Financely covers the legal structure in more detail in What Is a Counter-Guarantee?

A Counter-Guarantee Is Not a Confirmation

This distinction matters.

A confirming bank typically adds its own undertaking to an existing documentary credit or standby structure.

A counter-guarantee does something different.

Bank A issues a counter-guarantee to Bank B. Bank B then issues a new and legally separate guarantee to the final beneficiary.

The distinction is examined separately in SBLC Confirmation vs. Counter-Guarantee.

Direct vs. Indirect Bank Guarantees

A direct guarantee is usually simpler.

The contractor's bank issues directly in favor of the employer. There is one issuing institution and one beneficiary relationship.

An indirect structure becomes necessary when the beneficiary requires a local issuer or the foreign bank cannot issue an acceptable undertaking directly into the jurisdiction.

Why Beneficiaries Require a Local Bank

The requirement can arise from procurement rules, contract wording, internal treasury policy or local law.

A government authority may maintain an approved list of domestic banks. A national oil company can require all contractual guarantees to be available for demand locally. A customs authority may accept only guarantees issued by banks licensed under its domestic regulatory framework.

Local issuance also simplifies operational handling.

The beneficiary presents to a known domestic institution. It does not need to evaluate an overseas issuer, foreign law, foreign banking holidays or cross-border presentment mechanics each time it enters a contract.

URDG 758 and the Independence Principle

Demand guarantees and counter-guarantees are frequently issued subject to the ICC Uniform Rules for Demand Guarantees, URDG 758.

The central concept is independence.

The local guarantee is independent of the underlying EPC contract. The counter-guarantee is also independent of the guarantee and underlying relationship.

This is important because the local bank does not want its reimbursement rights to depend on resolving the contractor's commercial dispute with the project owner.

If the beneficiary presents a complying demand under the local guarantee and the local bank honors, that bank needs a defined documentary path to recover from the counter-guarantor.

Review ICC URDG 758.

Bid Bonds

A bid bond protects the procuring entity during the tender stage.

The guarantee can be called if the bidder improperly withdraws during the bid-validity period, refuses to execute the awarded contract or fails to provide the required performance security.

International contractors often need bid bonds before they know whether they will win the contract. Requiring cash collateral for every tender can therefore consume substantial liquidity across multiple bids.

A revolving bank-guarantee facility allows individual tender bonds to use a broader contingent-credit line rather than requiring a new standalone cash deposit for every bid.

Performance Guarantees

After contract award, the bid bond is usually replaced by a larger performance guarantee.

A project owner can require a guarantee equal to 5%, 10% or another percentage of the contract amount for the duration of the contractor's main performance obligations.

A $500 million EPC project with a 10% performance guarantee therefore consumes $50 million of guarantee capacity before considering any advance-payment, customs, retention or warranty guarantees.

For large contractors, contingent-credit capacity can become a constraint on new contract awards even when the company has adequate operating liquidity.

Advance-Payment Guarantees

The Saipem transactions demonstrate one of the most common uses of counter-guarantee facilities.

Large EPC contracts often provide the contractor with an advance for mobilization, engineering, procurement or material purchases.

The employer does not want to advance $50 million or $100 million without security. It therefore requires an advance-payment guarantee covering the amount that remains unearned.

As work is certified, the contractual advance can be amortized. A properly drafted guarantee can reduce in parallel with the outstanding advance.

The counter-guarantee should reflect those reduction mechanics so that the supporting foreign bank does not remain exposed to a materially higher amount than the local guarantor.

Retention Guarantees

Project owners commonly retain part of each progress payment until completion.

A contractor can sometimes substitute a retention guarantee for that trapped cash.

Instead of the employer withholding 5% of certified invoices throughout the construction period, the bank guarantee protects the employer and the contractor receives more of its earned cash.

The guarantee therefore performs a working-capital function even though no loan proceeds are advanced by the issuing bank.

Warranty and Maintenance Guarantees

Guarantee exposure can continue after mechanical completion.

The contractor can be required to provide a warranty, maintenance or defects-liability guarantee covering obligations during the post-completion period.

This matters when calculating facility requirements because several generations of guarantees can overlap.

A contractor can simultaneously have outstanding guarantees relating to tenders, projects under construction and projects already in the warranty period.

Counter-Guarantees for Customs and Regulatory Obligations

The same architecture can be used outside conventional EPC contract guarantees.

Customs authorities can require guarantees covering temporary imports, duties, bonded inventory or equipment entering a jurisdiction under a special regime.

Licensing authorities, concession grantors and other government agencies can impose similar requirements.

Financely covers these requirements separately through its Guarantee Arrangement for Contracts and Customs.

The Local Bank Is Taking Real Credit Risk

The local guarantor is not simply a communications intermediary.

It issues its own independent undertaking.

If the beneficiary makes a complying demand, the local bank can have to honor that demand before receiving reimbursement from the foreign counter-guarantor.

It therefore needs to be satisfied with the counter-guarantor's credit quality and the documentary mechanics of the counter-guarantee.

Its underwriting can include:

• foreign bank rating;
• regulatory jurisdiction;
• existing correspondent relationship;
• current bank exposure limit;
• country risk;
• transaction amount;
• guarantee tenor;
• underlying contract;
• applicant;
• beneficiary;
• sanctions screening;
• counter-guarantee wording; and
• reimbursement mechanics.

This is why naming a reputable foreign bank is not enough. The local bank must actually have appetite and available limit for that institution.

Correspondent Banking Can Determine Whether the Deal Works

International guarantee arrangements depend heavily on established bank-to-bank relationships.

A local bank is generally more comfortable accepting a counter-guarantee from an institution with which it already exchanges authenticated SWIFT traffic and maintains a credit relationship.

If the contractor's bank has no usable relationship with the required local issuer, another correspondent may have to be introduced.

Adding another bank increases cost and operational complexity. It can still be preferable to attempting to establish a new fully cash-collateralized guarantee line in the project country.

The Counter-Guarantee Must Usually Expire Later

A local guarantee and its counter-guarantee should not normally expire at the same instant without considering the downstream claim period.

Assume the final guarantee expires on December 31.

The beneficiary presents a complying demand on December 31. The local bank needs time to examine and honor the demand and then make its own presentation to the counter-guarantor.

If the counter-guarantee has already expired, the local bank can lose the very reimbursement protection on which it relied when issuing.

Banks therefore commonly require a tail or additional claim period under the counter-guarantee. The appropriate period depends on the governing rules, presentation mechanics and local bank policy rather than a universal formula.

Amount Mismatches Need to Be Addressed

A $10 million local guarantee does not necessarily result in a counter-guarantee with exactly the same maximum exposure.

The local bank can require the counter-guarantee to cover additional interest, fees, expenses or other amounts it may incur in connection with a complying demand.

Currency mismatch can create another buffer requirement.

A final guarantee issued in Saudi riyals against a euro or U.S. dollar facility can require specific treatment of exchange-rate movements and available credit limits.

Demand Mechanics Need to Be Back-to-Back

A counter-guarantee is sometimes described commercially as back-to-back with the local guarantee.

The documents still need to make that result possible.

If the local bank receives a demand that requires payment today but its counter-guarantee requires documents that cannot be produced for another week, the structures are not truly aligned.

Banks therefore review:

• required demand statement;
• supporting documents;
• presentation address;
• presentation method;
• business-day conventions;
• partial drawings;
• multiple drawings;
• reduction provisions;
• expiry; and
• extend-or-pay mechanics.

Extend-or-Pay Demands

Construction schedules slip.

A performance guarantee expected to expire at provisional acceptance may still be outstanding because completion has moved by six months.

The beneficiary can therefore request extension and make a demand if the guarantee is not extended.

URDG 758 includes specific provisions addressing extend-or-pay demands.

In an indirect structure, the local bank will often require extension of its counter-guarantee before extending the final undertaking. Contractors should therefore begin extension work well before the expiry date.

Counter-Guarantees Consume Bank Lines

Guarantees may be contingent liabilities, but they still consume credit capacity.

A contractor with a $100 million guarantee line cannot necessarily issue unlimited bid and performance bonds merely because none has been called.

Every outstanding undertaking uses part of the approved line until it expires, is cancelled or is formally released.

International EPC companies can therefore become guarantee-capacity constrained even while reporting substantial revenues and positive operating cash flow.

Winning additional contracts can require an increase in contingent-credit capacity before additional working-capital debt is required.

Guarantee Capacity Is Part of Working Capital

The financial effect of guarantees can be substantial even though they do not provide cash directly.

An advance-payment guarantee allows a contractor to receive mobilization money.

A retention guarantee can release cash that the employer would otherwise withhold.

A performance guarantee can satisfy the employer's security requirement without the contractor depositing the same amount of cash directly with the employer.

The economic function of a bank guarantee is therefore often the release or preservation of liquidity.

Example of the Guarantee Stack on a $200 Million EPC Contract

Consider an illustrative EPC contractor awarded a $200 million industrial project.

These instruments would not necessarily remain outstanding simultaneously at their maximum amounts. The example nevertheless shows why guarantee facilities can reach meaningful sizes relative to annual project revenue.

A contractor managing several similar projects can require hundreds of millions of dollars of contingent bank capacity.

Who Ultimately Takes the Risk?

The Saipem transaction provides an unusually clear example of risk distribution.

Saudi Aramco relied on the local Saudi bank.

The local Saudi bank relied on UniCredit's counter-guarantee.

UniCredit retained part of the Saipem risk and transferred another portion to SACE.

Saipem remained economically responsible under its own mandate, indemnity and reimbursement obligations.

A single advance-payment guarantee therefore connected the employer, local issuing bank, international relationship bank, export-credit institution and EPC contractor through separate contractual layers.

Third-Party Collateral Can Sit Behind the Counter-Guarantee

Some contractors have the contract but do not have enough unencumbered balance sheet to obtain the required counter-guarantee line.

Additional collateral support can potentially be introduced if the applicant bank accepts it.

That creates a more complex credit chain.

The collateral provider does not replace the banks' underwriting.

The applicant bank still needs to approve the collateral source and transaction. The local bank still needs to approve the counter-guarantor. The beneficiary still needs to accept the local guarantee.

Counter-Guarantee Pricing

There is no universal counter-guarantee fee.

Pricing depends on the applicant's credit, collateral support, bank relationship, tenor, country, local issuer and transaction type.

Total economics can include:

• counter-guarantor bank commission;
• local issuing-bank commission;
• facility or commitment fee;
• cash-margin opportunity cost;
• collateral-provider cost where applicable;
• SWIFT charges;
• correspondent-bank charges;
• legal fees;
• amendment fees;
• extension fees; and
• arrangement expenses.

Contractors should model these costs in their bid rather than treating the guarantee requirement as an administrative expense after award.

Revolving Counter-Guarantee Facilities

A company executing international contracts repeatedly should not necessarily arrange every guarantee as a separate credit transaction.

Banks can establish an aggregate guarantee or counter-guarantee facility.

Individual guarantees then utilize that line as contracts are awarded. Capacity becomes available again as undertakings expire, reduce or are released.

The facility can contain sublimits by:

• country;
• local issuing bank;
• guarantee type;
• project;
• currency;
• maximum tenor; and
• aggregate exposure.

Financely's Counter-Guarantee Facility Structuring service is intended for this type of recurring requirement.

What Happens After a Demand?

Assume the contractor fails to perform and the project owner makes a complying demand under the local performance guarantee.

The local bank examines the demand according to the guarantee terms and applicable rules.

If the demand complies, the local bank honors.

The local bank then makes the required demand under the foreign bank's counter-guarantee.

The counter-guarantor examines that presentation separately.

If the counter-guarantee demand complies, the foreign bank reimburses the local bank.

The foreign bank then looks to the contractor under its reimbursement, indemnity and collateral arrangements.

The Contractor Can Still Dispute the Underlying Claim

Payment under an independent demand guarantee does not necessarily determine who was commercially right under the EPC contract.

The contractor can believe that the employer's claim was wrongful and pursue remedies under the construction contract while its bank remains obligated to deal with a complying documentary demand.

This is why guarantee wording needs serious legal review.

A first-demand instrument can create liquidity consequences long before the underlying contractual dispute is finally resolved.

What Banks Need to Underwrite the Transaction

A bank-ready counter-guarantee request should normally identify:

• applicant;
• ultimate beneficial owners;
• beneficiary;
• underlying contract;
• contract value;
• project country;
• guarantee type;
• required guarantee amount;
• required wording;
• currency;
• expiry;
• local issuing-bank requirement;
• proposed counter-guarantor;
• applicable ICC rules;
• applicant financial statements;
• existing bank facilities;
• available collateral;
• KYC documentation; and
• sanctions-sensitive counterparties or jurisdictions.

Common Reasons Counter-Guarantee Transactions Fail

A strong underlying contract does not guarantee successful bank issuance.

• The beneficiary insists on a local bank that has no appetite for the proposed foreign counter-guarantor.
• The contractor lacks sufficient unused guarantee capacity.
• The contractor assumes its ordinary revolving loan line can also support guarantees.
• The local guarantee wording creates obligations the counter-guarantor will not support.
• The counter-guarantee expires too early.
• The facility amount does not cover local-bank fees or additional exposure.
• The underlying contract changes after bank approval.
• The beneficiary requests automatic extension terms the bank will not accept.
• Country or sanctions exposure changes.
• The local bank requires cash margin from the foreign bank or applicant.
• Local law requires a prescribed guarantee format.
• The bank chain is discovered only after the contractor has signed the contract.

Structure the Guarantee Before Signing the Contract

Contractors should review guarantee requirements during bid preparation.

Waiting until after contract award can create a serious execution problem.

The company can discover that its bank will not accept the employer's wording, the local bank will not accept its relationship bank, or the required guarantee consumes more credit capacity than expected.

At that point, the contractor can already be contractually obligated to deliver the instrument within a fixed number of days.

What Financely Does

Financely provides paid advisory and arrangement services for companies that need international bank guarantees, counter-guarantees and local guarantee issuance.

Financely does not itself issue bank guarantees. Counter-guarantor and local issuing banks independently approve their own exposure and final instrument terms.

Counter-Guarantee FAQ

What is a counter-guarantee?

It is an independent undertaking issued by one bank in favor of another bank in connection with the second bank's issuance of a separate guarantee.

Why would a contractor need one?

Counter-guarantees are commonly required when a foreign contractor needs a bid, performance or advance-payment guarantee issued by a local bank in the beneficiary's jurisdiction.

Is there a real example?

Yes. Saipem disclosed a Saudi Aramco transaction in which UniCredit issued a counter-guarantee to a Saudi local bank and SACE counter-guaranteed part of UniCredit's exposure. The local bank issued the underlying advance-payment guarantee for the Berri Increment Programme.

Is a counter-guarantee governed by URDG 758?

Many international demand guarantees and counter-guarantees incorporate URDG 758. The actual applicable rules depend on the wording of each instrument.

Can a counter-guarantee support a performance guarantee?

Yes. Performance guarantees are a common use of indirect guarantee structures in international EPC, construction and supply contracts.

Can it support an advance-payment guarantee?

Yes. The Saipem Berri and Marjan structures are documented examples involving locally issued advance guarantees supported by international counter-guarantee arrangements.

Does the local bank have to accept the foreign bank?

No. The local bank applies its own correspondent-bank and counterparty credit limits. It can reject the proposed foreign counter-guarantor even where that institution is internationally recognized.

Why does the counter-guarantee usually expire later?

The local bank needs sufficient time after a potential demand under its guarantee to make the required presentation to the counter-guarantor.

Can SACE or another ECA support a counter-guarantee?

Depending on the applicable program and transaction, export-credit or government-backed institutions can assume portions of bank guarantee exposure. Saipem's disclosed Saudi transactions provide real examples involving SACE.

Can third-party collateral support the structure?

Potentially. The applicant bank must independently approve the collateral provider, source of collateral, security documentation and underlying transaction.

What should be submitted to Financely?

Provide the contract or tender, project jurisdiction, beneficiary, guarantee type, required amount, required wording, expiry, existing bank relationship and details of any local issuing-bank requirement specified in the contract.