The utilisation of a Standby Letter of Credit is no longer just an instrument utilised for Trade Finance, but is also used as an instrument for monetisation, and therefore must have strict verbiage mirroring that of the Demand Bank Guarantee, which is governed by ICC Uniform Rules for Demand Guarantees, (URDG 760). This ensures the Beneficiary of the Standby Letter of Credit can apply to their bank for capital injections, loans and lines of credit, referred to as Credit Guarantee Facilities.
The transaction process of a Standby Letter of Credit and a Demand Bank Guarantee is virtually the same, and is where one company, (the Provider), requests their bank, (The Issuing Bank), to temporarily transfer a Standby Letter of Credit to another bank, (The Receiving Bank), for credit to their clients account, (the Beneficiary). Ownership of the asset returns to the Provider on the expiry of the Standby Letter of Credit.
Please go to “See What Is a Leased Bank Guarantee” for the complete explanation of a Leased Standby Letter of Credit transaction.
When monetising a Standby Letter of Credit or Bank Guarantee, monetisers tend to prefer the Bank Guarantee over the Standby Letter of Credit, as it is non-transferrable. Of greater interest to the Beneficiary is the LTV, (Loan to Value), which is dependent on the contingent liability, of the underlying transaction.
To understand the Leased Standby Letter of Credit transaction, it is important to understand the difference between a Standby Letter of Credit, (SBLC), and a Documentary Letter of Credit, (DLC). When utilising a Standby Letter of Credit, payment will only be made if the buyer does not perform, but under a Letter of Credit, payment will only be made if the seller performs. However, when a Standby Letter of Credit is used for monetisation, it is not only a means of payment, as is a Documentary Letter of Credit, but like the Bank Guarantee becomes security for a payment.
Today, companies seeking to access loans and lines of credit, come up against many barriers, not least their banks. IntaCapital Swiss, are pulling down these barriers through their innovative product, the Collateral Transfer Facility, which utilises both Bank Guarantees and Standby Letters of Credit, and are making available Credit Guarantee Facilities to those companies where loans and lines of credit where being denied.