What is a SBLC?
Popular amongst both importers and exporters is the Standby Letter of Credit, which is utilised as a payment of last resort and is a contract between the buyer/importer and the seller/ exporter, where the buyer instructs their bank to open a Standby Letter of Credit on the seller, and if the buyer reneges on reimbursing the seller, the seller will instruct their bank to claim against the Standby Letter of Credit, in order to receive payment.
The word leased in a Leased Standby Letter of Credit is an ambiguity, and has been incorrectly used for years, whereas the correct definition is Collateral Transfer. The word leased has its foundations in a commercial leasing contract, which has remarkable similarities to a Leased Bank Guarantee, and although the term is incorrect, it is now used for a Leased Standby Letter of Credit on a daily basis.
Monetising a Standby Letter of Credit
Both the Bank Guarantee, and the Standby Letter of Credit are used as instruments for monetisation, and in this respect the verbiage contained therein is similar and both therefore are governed by ICC Uniform Rules for Demand Guarantees, (URDG 760). Therefore, beneficiaries of the Leased Standby Letter of Credit can apply for capital injections, loans and lines of credit, often alluded to as Credit Guarantee Facilities, from their bankers, utilising the Standby Letter of Credit as security.
The transaction for both these assets are strikingly similar and it is where the asset owner, (the Provider), instructs their bank, (The Issuing Bank), to transfer, for a temporary period of time, (usually one year), a Standby Letter of Credit, to another bank, (The Receiving Bank), favouring their client, (the Beneficiary). On expiry of the Standby Letter of Credit, the ownership of the asset returns to the Provider.
A complete explanation for a Leased Standby Letter of Credit transaction is available at “See What Is a Bank Guarantee”.
A number of companies are unsure whether to us a Bank Guarantee or a Standby Letter of Credit for monetisation purposes. It is generally acknowledged that monetisers prefer the Bank Guarantee, as unlike the Standby Letter of Credit it is non-transferable. The real question is what is the LTV, (Loan to Value), and the answer is, it will be determined by the contingent liability, of the underlying transaction.
There is a subtle difference between a Standby Letter of Credit, (SBLC), and a Documentary Letter of Credit, DLC), where payment is only is only made if the seller performs and under a Standby Letter of Credit payment is only made on non-performance of the buyer. Both the Standby Letter of Credit and the Documentary Letter of Credit are means of payment, but when a Standby Letter of Credit is monetised it becomes, like a Bank Guarantee, a guarantee of payment.
In a market where the availability of credit facilities is declining rapidly, IntaCapital Swiss, is becoming famous for their ability to provide companies access to loans and lines of credit. Utilising their unique financial model, the Collateral Transfer Facility which makes use of Bank Guarantees and Standby Letters of Credit, IntaCapital Swiss have halted the decline in credit availability.