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Monetising a Standby Letter of Credit

Collateral Transfer

The word leased in a Leased Standby Letter of Credit, is not an official banking term, and is a technical inaccuracy, the proper description being Collateral Transfer. The word Leased is thought to have originated from a commercial leasing contract that has similar attributes to a Leased Bank Guarantee, where the term was initially utilised, before being applied incorrectly by financial laymen, to many other instruments including the Standby Letter of Credit.

For those companies who have been denied access to credit facilities by their own bankers and other traditional financiers, Collateral Transfer is an opportunity to access such facilities. This is where effectively a company will import or rent a Standby Letter of Credit from another company, usually for a period of one year.

Two parties will sign a Collateral Transfer Agreement, and it is where one company, the owner of the asset and referred to as the Provider, will instruct their bank to transfer a Standby Letter of Credit to another bank, in favour of another company, referred to as the Beneficiary. The Beneficiary will pay a fee to the Provider for use of the instrument. This fee is referred to as the Collateral Transfer Fee.

For more information on the Provider, please see below.

Credit Lining a Standby Letter of Credit

When monetising a Standby Letter of Credit, the verbiage contained therein must mirror that of a Demand Bank Guarantee. A Demand Bank Guarantee has specific and exact verbiage unique for monetising purposes, and is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758).

For more information on URDG 758 please go to “URDG, (Uniform Rules for Demand Guarantees)”.

Once the Standby Letter of Credit has been applied to the Beneficiary’s account, they can with confidence, approach their bankers with applications for loans and lines of credit, (often alluded to as Credit Guarantee Facilities), offering the Standby Letter of Credit as security.

There are, however, examples where banks have refused applications for credit facilities, (usually due to stringent in-house compliance regulations), despite being offered a first-class security in the form of a Standby Letter of Credit.

IntaCapital Swiss, renown for their customer service, are able to produce alternative lenders, referred to as third-party lenders, who will be delighted to offer Credit Guarantee Facilities against the security of a Standby Letter of Credit.