A guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfil a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer’s credit quality and repayment abilities. The bank issuing the SBLC will perform brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Also known as a “non-performing letter of credit”.
A standby letter of credit will typically be in force for about one year, allowing for enough time for payment to be made through standard contractual guidelines. Standby letters of credit are often used in international trade transactions, such as the purchase of goods from another country. The seller will ask for a standby letter of credit, which can be cashed on demand if the buyer fails to make payment by the date specified in the contract. The cost to obtain a Standby Letter of Credit is typically 4-15% of the face amount annually, but the letter can be canceled as soon as the terms of the contract have been met by the purchaser or borrower.
A Standby Letter of Credit (called “SLC“ or “LC”) are written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event that the customer does not pay the beneficiary. It is important to note that standby letters of credit apply only whenever the issuing bank’s commitment to pay is not contingent on the existence, validity and enforceability of its customer’s obligation; this is called an “abstract” guarantee; that is, the bank’s obligation is to pay regardless of any disputes between its customer and the beneficiary. The issuance of letters of credit is a private transaction and does not result in the issuance of any public trading securities.
The standby basically fulfils the same purpose as a bank guarantee: it is payable upon first demand and without objections or defences on the basis of the underlying transaction between the applicant and the beneficiary. It is up to the beneficiary to decide whether he may accept a standby.
Assignment of Standby letter of credit proceeds -The beneficiary can assign the proceeds of a standby letter of credit. But this assignment does not assign the rights of the beneficiary as “drawer” on the standby letter of credit, and only the beneficiary may exercise the “drawer” rights and present the demand for payment under the terms of the standby letter of credit unless the terms of the instrument provide otherwise. This means that the assignee may receive the proceeds of the standby, but in order to obtain those proceeds the beneficiary must first make the demand for payment. This also means that the beneficiary can sell by assignment, at discount, the benefits of the standby. An assignment of proceeds requires notice to the issuing bank of this action; otherwise the issuing bank would pay the beneficiary rather than the assignee.
Transfer of Standby letter of credits. Standby letter of credits can be transferred to a third party ONLY with the written consent of the issuing bank AND the beneficiary. Are standby letter of credits the subject of trading?
There is no public market for the trading of standby letters of credits. Standby letters of credits can only be transferred or the proceeds assigned in private transactions (as previously noted above).
Standby letters of credit do not have CUSIP or ISIN numbering. Standby letters of credits are not trading securities, trading debt instruments, or trading investment funds, and therefore are not subject to the rules and regulations of the Security and Exchange Commission.
Our trade finance experts provide you with structuring, mitigation and financing expertise and up-to-date country and trade risk guidance to support and expedite your trade transactions. MTG has expertise in structuring Standby Letters of Credit or Guarantees to meet your business needs while helping to protect your interests to the extent possible in the circumstances. By providing the necessary documentation to assist in proving a buyer or seller’s trustworthiness, institutions such as MTG can significantly help businesses and contribute to the furtherance of international trade.
MTG has developed numerous Standby Letter of Credit or Guarantee proformas to meet a variety of scenarios; we can customize any of our formats to suit your needs, subject to certain requirements.
Different types of Standby Letters of Credit or Guarantees offered by MTG