Monetising a Leased Standby Letter of Credit is similar to that of a Leased Bank Guarantee as it calls for a Demand Bank Guarantee, which is governed by ICC Uniform Rules for Demand Guarantees, (URDG 760). The verbiage is exact, and as a Leased Standby Letter of Credit falls under the governance, for this particular transaction, the verbiage by definition is exactly the same and beneficiaries of both instruments can approach their banks and request loans or lines of credit, referred to as Credit Guarantee Facilities.
Furthermore the transactions for both a Leased Bank Guarantee and a Leased Standby Letter of Credit are the same and is where one company, (the Provider), requests their bank, (The Issuing Bank), to transfer on a temporary basis, a Standby Letter of Credit to another company (the Beneficiary), for application to their account at their bank, (The Receiving Bank). As the Standby Letter of Credit has only be transfer for a limited period of time, the ownership returns to the Provider on expiry of the instrument.
The choice of whether to choose a Bank Guarantee or Standby Letter of Credit for monetisation is not particularly difficult as monetisers tend to prefer Bank Guarantees, as unlike Standby Letters of Credit, they are non-transferable. The LTV, (Loan to Value), will be determined by the contingent liability, in respect of the underlying transaction.
An important difference between a Standby Letter of Credit, (SBLC), and a Documentary Letter of Credit, (DLC), is that payment under a Documentary Letter of Credit is guaranteed only if the seller performs, whereas under a Standby Letter of Credit, payment is only guaranteed if the buyer does NOT perform. A subtle point is that while a Standby Letter of Credit and a Documentary Letter of Credit are both means of payment, when a Standby Letter of Credit is monetised, like a Bank Guarantee, it also becomes a guarantee of payment.
Monetising a Standby Letter of Credit is all about obtaining Credit Guarantee Facilities, and with its ground breaking financial model, the Collateral Transfer Facility, which utilises both Bank Guarantees and Standby Letters of Credit, IntaCapital Swiss, continues to supply access to loans and credit lines to a market impoverished of credit facilities.
As a payment of the last resort, the Standby Letter of Credit has proved to be a popular instrument within the realms of Trade Finance, and it is where one company, (The Buyer), instructs his bank to open a Standby Letter of Credit if favour of another company, (The Seller). If the buyer fails to meet their financial obligations, under Terms and Conditions of the Standby Letter of Credit, the seller will instruct their bank to claim against the Standby Letter of Credit, in order to receive full reimbursement.
Collateral Transfer, is the correct term for what is erroneously referred to as a Leased Standby Letter of Credit. The term leased, as some financial experts expound, has its origins in a commercial leasing contract, which closely resembles that of a Bank Guarantee contract, where the term leased was accidentally attached and incorrectly produced the term, a Leased Bank Guarantee. The term leased is now incorrectly attached to a number of financial instruments, including a Leased Standby Letter of Credit, but as it is embedded in today’s financial communications, will continue to be used for years to come.