THE CLIENT MUST COMPLY WITH AML REGULATIONS WITHOUT EXCEPTION

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Financial Collateral has mandatory KYC policies in place to deter people from laundering money. We are obliged to conduct a comprehensive KYC “Due-diligence to comply with international banking rules, AML Policy, and with the rules established by our various principals and the domestic laws of their countries.

STANDBY LETTERS OF CREDIT AND BANK GUARANTEES

SBLC Provider- Standby Letter of Credit (SBLC) / Bank Guarantee (BG)

Financial instruments, mainly Bank Guarantees or Standby Letters Of Credit (BG/SBLC),  are monetary contracts between parties. They can be created, traded, modified, and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).

International Accounting Standards IAS 32 and 39 define a financial instrument as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial instruments can be either cash instruments or derivative instruments:

· Cash instruments – instruments whose value is determined directly by the markets. They can be securities, which are readily transferable, and instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

· Derivative instruments – instruments that derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be exchange-traded derivatives and over-the-counter (OTC) derivatives.

ADVANTAGES OF SBLC/BG  

SBLC/BG denotes an irrevocable obligations assumed by banks. The principle that if a compliant demand is made under a standby letter of credit, an issuing bank must pay, subject to only very limited exceptions.

A key purpose of the widespread use of standby letters of credit to finance commodity transactions is the comfort it gives to the seller that it will receive payment.

The drafting of the SBLC should provide that the presentation of a demand would be conclusive evidence that the amount claimed was “due and owing” to the Beneficiary of the SBLC. The beneficiary’s belief that payment was “due and owing” should activate payment.

The meaning of the words “obligated to pay” has to be considered in the context of the certificate to be tendered under the SBLC.

Exceptions to the rule that an issuing bank must pay under an SBLC are limited and difficult to prove. If you have concerns about the reliability of your counterparty, requiring them to provide an SBLC from a reliable bank and governed particularly by English law remains a good way of securing payment.

If you are the beneficiary of an SBLC, you should insist that it contains clear wording to the effect that presentation of a demand by you will be conclusive evidence that the amount claimed will be “due and owing”. In order to rely on the strength of these decisions, you should also ensure that English law governs the SBLC, even if it does not govern the underlying contract.

The great utility of the standby letter of credit is reflected in the fact that it can be used in practically any situation in which one party to a contract is concerned with the other party’s ability to perform. Some of the many ways in which a standby letter of credit can be used are: to ensure payment or performance in construction financing, corporate consolidations, real estate transactions, management contracts, leases on real and personal property, stock transfers and purchases, and bid and performance bonds; to ensure payment of salaries to highly paid individuals such as professional athletes and entertainers; and to ensure payment of professional services such as attorney’s fees.

The standby letter of credit is neither a contract nor a negotiable instrument and if it is not properly drafted, it will not be considered a guarantee at all. The standby letter of credit or SBLC is a distinct legal instrument, unlike any other. The obligation of the issuer of the SBLC is independent of the underlying contract between the issuer’s customer and the beneficiary of the SBLC. The standby letter of credit enables a businessman to enter into business ventures with minimal fear of loss. By substituting the credit of a third party, usually a bank, for that of the debtor, the businessman can help to protect his investment. Finally, the standby letter of credit is particularly well suited for preventing loss or delay of payment caused by the debtor’s bankruptcy. Because the standby letter of credit and its proceeds are not part of the bankruptcy estate, the beneficiary of a standby letter of credit should receive payment from the bank without delay. The low cost and adaptability to a wide range of business transactions make the standby letter of credit very attractive to the business community and to business lawyers.

Financial Collateral has long experience in issuance of SBLC & BG and we have successfully attained closure many times over. Multinationals, Corporations, Banks, Airlines Operators, Investment Banking Companies,  Mine Owners, Project Owners, Oil & Gas E&P Companies/Traders/Refiners, Commodity Traders, etc. have successfully obtained SBLCs through us. If you follow our procedure, it is likely that you might obtain an SBLC provided you are financially capable to transact and possess the right business credentials. We, however,  do not accept SBLC / BG applications from either brokers or intermediaries.  

Buying a Bank Guarantee (BG) or Standby Letter of Credit (SBLC) Owned Instrument & Service Description

A Bank Guarantee (BG) is the name used mostly in Europe and Standby Letter of Credit (SBLC) is exactly the same, but used in the USA. Since we are working globally you will see the expression BG/SBLC in our documents.

Our Purchased Bank Guarantees –  Owned, are issued by World’s Top 25 Banks. We use the Bank SWIFT Network to have clients’ Owned Bank Guarantees (BG) and Standby Letters Of Credit  delivered Bank to Bank using SWIFT MT799 followed by SWIFT MT760. We operate a reliable, efficient delivery and authentication process.

STEP BY STEP PROCEDURE FOR OBTAINING BG/ SBLC

1. Beneficiary submits a signed official Letter Of Interest (LOI) for applying for SBLC/BG together with compliance documents:
1.1   Client Information Sheet (CIS)
1.2   Statement of Non-Solicitation of Funds
1.3 Irrevocable Fee Protection Agreement covering all identified beneficiaries/ intermediaries from both sides
1.4   Clear color copy of the beneficiary’s/Signatory’s passport
1.5   Certificate of Incorporation of beneficiary’s company
1.6  Proof of fund (POF): There must be availability of cash funds (not credit line) in the beneficiary’s bank account sufficient to cover at least the price of the first tranche of the instrument. This can be in the form of a Bank Comfort Letter (BCL) or RWA (ready, willing, and able) letter issued by the beneficiary’s bank and signed by at least two bank officers, or a screen shot of the account statement no older than three days from the date of filling the CIS.
2. After thorough and extensive  due-diligence of the applicant/beneficiary and subsequent approval by the Provider, applicant/beneficiary will receive the Deed Of Agreement (DOA) Format which spells out Terms and Conditions of the Contract, approved contract amount (Face Value), Individual tranche size and schedule, Price, etc.
3. The applicant/beneficiary completes the Deed of Agreement (DOA):
a. Accepting the SBLC price.
b. Confirming applicant’s/beneficiary’s bank will accept the Provider’s Corporate Invoice
c. Confirming acceptance of SWIFT MT799 BPU verbiage.
d. Confirming the Intermediary Fee Protection Agreement
e. Confirming the acceptance of the SWIFT MT760 (SBLC) verbiage
The filled & signed DOA must be returned on beneficiary’s letterhead & sent to FINANCIAL COLLATERAL via e-mail duly signed in blue ink and stamped on each page
4. After internal scrutiny and evaluation of the filled DOA received from the applicant/ beneficiary, the Provider might undertake another due-diligence of the applicant/beneficiary. Once satisfied, the Deed Of Agreement (DOA) would be countersigned by the Provider after filling in all the relevant information relating to the Provider and his Bank, and returned to either the applicant/beneficiary for lodging it in his bank or to the applicant’s/beneficiary’s bank directly
5. The fully executed Deed Of Agreement (now lodged with Provider’s and Beneficiary’s respective banks) becomes the legally binding contract between the two parties.
6. The Provider  will issue a Corporate Invoice to the Beneficiary’s bank showing the all-inclusive amount of the SBLC/BG price and commissions to be paid after the SBLC/BG has been delivered via SWIFT MT760.
7. The beneficiary’s bank will send a written confirmation via SWIFT MT799 to the Provider’s bank stating that “it is RWA (ready, willing and able) to receive the SBLC/BG as per the Deed Of Agreement.
8. Provider’s Bank will acknowledge the receipt of the SWIFT MT799 RWA send a counter MT799 RWA to the Beneficiary’s bank confirming it is ready, willing and able to send the SBLC/BG Pre-Advice via SWIFT MT799 to the Beneficiary’s Bank.
9. Within three (3) banking days, the Provider’s bank will issue the SWIFT MT799 Pre-Advice confirming that the instrument will be delivered against the issuance of SWIFT MT799 BPU (bank payment undertaking) by the beneficiary’s bank.
10. Beneficiary’s Bank will send the SWIFT MT799 BPU (Bank Payment Undertaking earlier used to be called ICBPO) as per the verbiage earlier provided in the DOA to guarantee payment for the Corporate Invoice after delivery of the SBLC/BG to beneficiary’s bank (Note: ICBPO is now banned)
11. Within five (5) banking days after Provider’s bank receives and authenticates the SWIFT MT799 BPU, the Provider’s bank will deliver  the SBLC/BG via SWIFT MT760 and also provide the copy of the SWIFT message via bank e-mail.
12. Within Five (5) banking days after the SBLC/BG is delivered and received by Beneficiary’s bank via SWIFT MT760 and is authenticated, the beneficiary’s bank will activate the Bank Payment Undertaking and pay the Provider via SWIFT MT103. The hard copy of the SBLC/BG to be delivered via bank bonded courier  to  the  beneficiary’s bank within  seven  (7)  days  after  the  payment  being  received  by  principal’s bank.
13. The beneficiary pays xxxxxxx percent all inclusive (xx% + 2%) of face value of each tranche, as per the relevant irrevocable fee protection agreement .
14. All subsequent tranches will be based on the same procedure, until the agreed amount of the contract with Provider reaches completion or the collateral or funds become exhausted.
15. Any unauthorized bank calls without prior agreement between parties, probes or communications, or an improper solicitation or disclosure involving any of the banks concerned in this transaction will result in immediate cancellation of this transaction and subject the violating party to damages.​​​

​GENERAL PROVISIONS AND CONDITIONS:

 

  1. Parties are not allowed to contact the other Party’s bank without express written permission. Any Party attempting to do so will lead to cancellation of this Agreement and invoke the penalties described in Paragraph 16, below. For greater clarity, any telephone calls, facsimile or other prohibited forms of communication shall cause the immediate cancellation of this transaction and incur a liability for damages on the part of the breaching Party.
  2. After countersign The LOI package by PRINCIPAL, the LOI becomes a legally binding Contract (Dead of Agreement) between both parties, only if the BENEFICIARY’s bank issues Proof of Fund (POF) and deliver to the PRINCIPAL’s Bank’s coordinated indicated in this document according timing of mentioned procedure. If the BENEFICIARY’s bank does not issue this mentioned SWIFT within Seven (7) calendar days after date of countersign LOI by the PRINCIPAL, will result immediate cancellation of this transaction and subject the violating party to damages. As mentioned in Paragraph 3 below.
  3. As mentioned in the Procedures above, should the BENEFICIARY default to pay the purchase price to the PRINCIPAL as agreed upon confirmation of BG MT760 in the BENEFICIARY’s bank account, PRINCIPAL will instruct the issuing bank to put a claim on the BG thereby obliging the BENEFICIARY’s Bank to return the BG   MT760 to the issuing Bank.
  4. Each Party warrants and represents that it has full power and authority to enter into this Agreement and to perform the transaction as per the terms stated herein.
  5. The Parties agree that the Non-Circumvention / Non-Disclosure rules of all issues from the (International Chamber of Commerce) ICC up to and including the latest edition apply and shall remain effective for a period of five years from the date of execution of this Agreement. All information contained herein including banking information and codes are privileged information and represent the sole property of the Party from which they originate.
  6. The terms of this Agreement are binding upon the Parties whose signatures appear herein. The Parties to this Agreement and their respective employees, agents, associates/affiliates, transferees, assignees or designees agree to be bound by the Non-Circumvention / Non-Disclosure and Force Majeure provisions of the ICC as mentioned in Paragraph 5 above.
  7. This Agreement is subject to the domestic laws of any country properly having jurisdiction over the subject-matter of this Agreement. The Parties agree that they will strive to resolve all disputes amicably. All disputes arising out of or in connection with the present Agreement that cannot be resolved amicably shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce in Paris, France, by one or more arbitrators appointed in accordance with the said Rules. The language of Arbitration shall be English and the governing law shall be the law of United Kingdom (England). The arbitration award shall be considered as final and shall be binding upon both Parties. The arbitration fee shall be paid by the losing Party.
  8. Neither Party may assign, transfer or delegate its interest or duties without prior written consent of the other Party. No modification, amendment or supplement of this Agreement shall be binding unless it is in writing and signed by both the BENEFICIARY and the PRINCIPAL.
  9. If any provision of this Agreement shall be or become prohibited or invalid under any applicable law, rule or regulation, then such provision shall be deemed ineffective to the extent of such prohibition or invalidity only, without thereby invalidating any of the remaining terms or provisions of this Agreement.
  10. Neither Party hereto is making any representation regarding the tax consequences, if any, of the transactions envisaged herein. It is understood that the BENEFICIARY and the PRINCIPAL individually accept responsibility and liability for any/all taxes, imposts, levies, duties or charges that may be applicable in the execution of their respective roles and the discharge of this Agreement.
  11. The BENEFICIARY and the PRINCIPAL shall be responsible only for those commissions/fees that they have respectively agreed, in writing, to pay.
  12. Each Party shall indemnify and hold harmless the other Party against any and all claims, demands, damages or expenses of any nature arising out of the execution or implementation of this Agreement for a period beginning with the execution of this Agreement and ending three (3) years after the date of the completion of all acts contemplated in this Agreement.
  13. The Parties hereby agree that the Parties have entered into this private transaction at their sole discretion and no one Party has solicited the other Party in any way neither it can be considered as the solicitation of funds. This transaction is strictly of a private nature between the private Parties which is being defined by this private Agreement. This transaction does not and shall not be interpreted as the sale of securities as defined by the Securities Act of 1933/34 of the United States of America as amended and/or any other laws of any other nation related to the securities transaction. This transaction/Agreement is exempted from the Securities Act and would not be required to be registered with any authority or with any government body department.
  14. This Agreement embodies the entire understanding of the Parties hereto. There is no other Agreement, understandings, representations or warranties, whether written or oral, in effect between the Parties. The Parties acknowledge that this Agreement is the sole governing document between the Parties. The Parties agree that this Agreement supersedes any and all prior correspondence, Agreements or drafts, which shall be null and void and of no further force and effect.
  15. All terms, condition and closing procedures of this Agreement shall be binding upon and inure to the benefit of the Parties hereto, and their respective heirs, legal representative, successor and assigns.  
  16. These documents may be signed in counterparts, which when taken together shall constitute an original. This document may also be transmitted by facsimile or email and shall be deemed as original for the purposes of enforceability. The Parties declare that they have read this entire Agreement and have clearly understood the same to its fullest.
  17. By signing this LOI / DOA, both parties agree under the laws and trading guidelines set forth by the ICC that they are ready willing and able to complete this transaction under the terms and conditions stated within this letter of intent.
  18.  EDT (Electronic document transmissions) shall be deemed valid and enforceable in respect of any provisions of this Contract. As applicable, this agreement shall be: (1)-Incorporate U.S. Public Law 106-229,” Electronic Signatures in Global and National Commerce Act” or such other applicable law conforming to the UNCITRAL Model Law on Electronic Signatures (2001) and; (2)-ELECTRONIC COMMERCE AGREEMENT (ECE/TRADE/257, Geneva, May 2000) adopted by the United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT). (3)-EDT documents shall be subject to European Community Directive No. 95/46/EEC, as applicable.
  19. Either Party may request hard copy of any document that has been previously transmitted by Electronic means provided however, that any such request shall in no manner delay the parties from performing their respective obligations and duties under EDT instruments.
  20. The BENEFICIARY hereby acknowledges and confirms that neither the Collateral Provider nor their associates, nor any person on their behalf solicited him/her in any way whatsoever that can be construed to be a solicitation herein. Both parties hereby confirm with full authority that the above terms are agreed and acceptable.

IMPORTANT TO NOTE:

1. We accept applications only from actual end-user(s) of the SBLC/BG and we do not accept applications from any Broker/Intermediary/Consultant unless these entities are pre-approved by our compliance department.

2. If you are looking to Purchase or Lease an SBLC/BG, the current rates would be applicable. All purchases and Leasing involve 2% Intermediary commissions.

3. We will need Proof Of Funds (cash fund equivalent to or more than the total Price/Leasing Fee and Commissions) in the form of either a BCL, RWA, or Tearsheet duly signed by at least two (2) Bank officers of the Bank where the applicant maintains his/her transaction Bank Account.

4. The Instrument Transaction Terms are non-negotiable

5. The CIS must be submitted on Official Letterhead of the Applicant duly filled, signed, stamped, and notarized by competent judicial/legal authority. 

6. There are no upfront charges involved in the transaction at any stage. 

7. We will send to the Applicant a DOA (Deed Of Agreement) in MS Word format only when our compliance department clears the CIS after conducting all necessary due diligence about the applicant. 

SBLC/BG PROVIDERS- WHO THEY ARE

HOW DOES ONE FIND A REAL AND GENUINE SBLC/BG PROVIDER

Standby Letter of Credit or Bank Guarantee (SBLC/ BG) Providers are mostly active in the secondary and the tertiary markets. ​But how does one find a genuine/reliable Provider for SBLC/BG ? To understand who these Providers are and how they function, one must understand about what is called as Collateral Transfers in the financial world. Collateral Transfer is basically the provision of transferring assets from one party (the Provider) to another party (the Beneficiary) often in the form of a Bank Instrument (BG or SBLC). This occurs whereby the Provider agrees (through his Issuing Bank) to issue a “Demand Guarantee” to the Beneficiary in return for a “rental” or “return” generally known as the “Contract Fee”. The parties agree to enter into a Collateral Transfer Agreement (CTA) which governs the issuance of the guarantee.

A Provider for SBLC/BG would often be a collateral management firm, a hedge fund, a Finacial Holding Company (FHC), a non-bank commercial company,  or private equity company. They are high net worth corporations or individuals who hold bank accounts at a bank which holds either large sums in cash deposits, bonds, or other for of security that can turn into legal tender. Basically, in most cases these are liquid assets at the immediate disposal of their owner. Whenever the occasion arises, a Provider instructs his bank to secure and encumber liquid assets/ cash in his own account and authorizes the bank to “cut” (an industry term meaning to create a financial instrument such as SBLC or BG. 

Provider’s bank has neither interest nor unsecured liability in such a transaction.  The bank receives its fee for “cutting” (creating) the SBLC/BG and “delivering” it to the Receiver/Beneficiary’s bank first digitally over the SWIFT Platform and subsequently a hard copy of the SBLC/BG via bank bonded courier. All liabilities that might arise from selling or leasing the SBLC/BG rests completely with the Provider since the financial instrument (SBLC/BG)  was created at the Provider’s instruction alone and also since it is secured against Provider’s cash/ liquid assets held by the bank. Provider’s bank that creates and delivers the SBLC/BG is called the Issuing Bank.

SBLC/BG Providers are a rare breed and are extremely difficult to find. Providers do not advertise themselves or send emails soliciting business from clients. As mentioned earlier, they are ult high net-worth corporations or individuals or funds and they hold a commanding position in the financial sector. Their businesses span across finance, banking, capital markets, oil & gas, commodities trading, manufacturing, IT, etc. More often than not, dealing in Financial Instruments is only a small portion of their business interests. 

Providers of SBLC/BG generally work through their brokers or mandates who further engage sub-brokers in the chain making direct access to Providers even more difficult. It is absolutely futile to look for SBLC/BG Providers over the Internet. For those who work in the Financial Services sector and interact closely with high net worth individuals, private equities, funds, asset managers, banks, etc. on a regular basis, the chances of coming across a genuine SBLC/BG Provider is much higher than those who are outside the Financial Services sector. 

 

SBLC/BG FACTS AND MYTHS

Additional Information

  1. All SBLC/BG are Asset/Cash backed. A newly created SBLC/BG is called “Fresh Cut” whereas an already existing SBLC/BG is called “Seasoned”
  2. ​​Whether purchased of leased, SBLC / BG is issued for a “term”  having validity normally for 1 year and 1 day which may extend up to multiple years depending on the Provider’s own discretion and Provider’s level of comfort with the Beneficiary.
  3. Banks will issue an SBLC/BG to any of its customers if they have sufficient cash in their bank account or available balance in their credit line (if they are already availing a credit line from the bank). It’s a complete myth that “Banks Do Not Issue SBLC/BG).  This is the “Primary Market” transaction.  
  4. Providers of SBLC/BG are a part of the “Secondary Market” transactions.  SBLC/BG Providers are high net worth corporations or individuals who hold bank accounts at the issuing bank that contain significant cash sums (assets).  SBLC/BG Provider would often be a collateral management firm, a hedge fund, or private equity company. SBLC/BG Provider  instructs its issuing bank to secure and encumber cash in his own account and authorizes the bank to “cut” (an industry terms meaning to create a financial instrument such as SBLC/BG ).  Effectively, the SBLC/BG  is “leased” or “sold” to the Beneficiary as a form of investment since the Provider receives a return on his commitment.
  5. SBLC/BG is issued under ICC/URDG758 (UPC 600) protocol and is readily accepted by almost all International as well as Private Banks.
  6. SBLC/BG is supplied by the Issuing Bank of the Provider to the Beneficiary’s bank account at the Receiving Bank and is transmitted inter-bank via the appropriate SWIFT platform alone (MT-760).
  7. The Provider and the Beneficiary agree to enter into a Collateral Transfer Agreement (CTA) which governs the issuance of the SBLC/BG. The SBLC/BG is specifically issued to the Beneficiary for a defined purpose and each contract is bespoke. It is effectively a form of “Securities Lending” and often a derivative of “re-hypothecation”. The fact that there is an underlying agreement (the CTA) has no bearing on the wording or construction of the Guarantee (SBLC/BG). This allows the Beneficiary to use the SBLC/BG to raise credit, to guarantee credit lines and loans or to enter trade positions or buy/sell contracts.
  8. SBLC/BG is valuable in the secondary and tertiary markets, and this also creates an environment for Intermediaries to profit on the leasing and selling of SBLC/BG. Unfortunately, this also creates misunderstandings and opportunities for fraud. Scammers keep trying, by imposing their “procedures” which in general, involve rushed deals with no hard copies to follow, advanced payments, and so on.
  9. By its own nature and definition, only banks can legally issue SBLC (Stand-By Letters of Credit) or BG (Bank Guarantee). This is not only common sense, but actually regulated by banking laws in most countries since these are debt obligations issued by banks.
  10. SBLC/BG must be UCP-600 compliant and hence it must be issued by a licensed bank alone. Otherwise, it will not be UCP-600 compliant, regardless of the wording of the document.  If it is not UCP-600 compliant, no bank will ever accept it as collateral or even as a documentary credit. While it is true that URDG-758 changed this from banks to “a bank, other institution or person” may act as a guarantor, the fact is that URDG-758 rules implied that financial stability of the guarantor is obligatory, and that the issuance of said documents shall be governed by the internal legislation of each country. Regardless, most banks will only accept documentary credit from other banks, due to their financial stability and their full compliance with local laws.
  11. Banks, in general, will monetize only an “owned/purchased” SBLC/BG. They will not monetize a “leased” SBLC/BG. In contrast to a purchased or owned SBLC where the buyer becomes the official owner of the instrument and in turn would be able to lease the SBLC out to a Third Party, a “leased SBLC” cannot be “leased out” any further. 
  12. There are private Monetizers who would monetize a “leased” SBLC/BG. Some Monetizers will, however, only accept SBLC/BG with CUSIP or ISIN Numbers. This means they will NOT accept a fresh cut bank guarantee, ONLY seasoned instruments. Seasoned BG’s cost more and generally are only available to be purchased from secondary owners not banks.
  13. Although a leased SBLC/BG is not considered an “asset” (a leased SBLC/BG is not trading securities, trading debt instruments, or trading investment funds. There is no public market for the trading of SBLC/BG. All SBLC/BG transactions are private transactions), it can still be monetized, discounted or funded (whereby the SBLC/BG is turned into usable cash) by a resourceful Monetizer. Remember, SBLC/BG is after all a written obligation of the issuing bank to pay a sum on to a beneficiary on behalf of their customer in the event that the customer himself does not pay the beneficiary. The Instrument/ Security remains valid during the term before the Expiry Date. Such resourceful Monetizers possess the capacity to a draw a line of credit against “leased” SBLC/BG and use part of the cash to pay the client his “Non Recourse Monetization Payment” (often 40% to 65% of the value of the Leased Bank Instrument known as “Loan To Value” (LTV). The Monetizer then takes the balance of the money from the Line of Credit and places these funds into Trade / PPP using a proprietary trading platform. This platform is often a group of experienced bank traders who use the Monetizers cash and trade it generating significant profit returns on a weekly or monthly basis. Often the Platform uses normal trading risk protection strategies to ensure the Monetizers funds receive significant protection from all trading downside risk.
  14. Most people often confuse the term NOT RATED with the fact that some SBLC/BG issuing entities are not real banks, but private companies offering consulting services, and sometimes, issuing documents that are beyond their legal and financial capacity, hiding themselves behind the excuse that because they are an “offshore bank” or a foreign corporation or because they only deal with foreigners, they do not need to hold a banking license or comply with reserve deposits with the Central Banks of the jurisdictions from where they operate. The reality is, a rating is just an opinion given by one person or company, about the credibility of the bank or institution what the rating is about; but this has almost nothing to do with the truth, that the documents in question are worthless not because of the credit rating of the issuer, but because the issuer is not a bank. 
  15. For political reasons, most Eurozone regulated banks avoid, as much as they can, to work with banks of certain countries. Trying to monetize an instrument issued by a Latin American country, or even China is almost impossible!! Even Europe is not free of that problem; for example, while the list of embargo banks from Russia and Ukraine is very small, most Eurozone regulated banks prefer to not accept as collateral instruments issued by any Russian or Ukraine based banks, they say it is to reduce their risks as much as possible, and to avoid working with banks that while not currently on the embargo list, can be included in said list at any time. Some other countries have strong, reliable and highly praised banks with excellent credit ratings, like Azerbaijan, yet almost no Eurozone regulated bank wants to work with instruments issued by them; this limits the ability of most monetizers to work with instruments from banks of these countries regardless of the credit rating of the bank.
  16. To determine if a borrower is worthy of an SBLC/BG, many banks will undertake a credit analysis. Credit analyses focus on the ability of the organization to meet its debt obligations, focusing on default risk. Lenders will generally work through the five C’s to determine credit risk: the applicant’s credit history, capacity to repay, its’ capital, the loan’s conditions, and associated collateral. This form of due diligence can revolve around liquidity and solvency ratios. Liquidity measures the ease with which an individual or company can meet its financial obligations with the current assets available to them, while solvency measures its ability to repay long-term debts. Specific liquidity ratios a credit analyst may use to determine short-term vitality are current ratio, quick ratio or acid test, and cash ratio. Solvency ratios might entail the interest coverage ratio.
  17. SBLC/BG denotes an irrevocable obligations assumed by banks. The principle that if a compliant demand is made under a standby letter of credit, an issuing bank must pay, subject to only very limited exceptions.
  18. A key purpose of the widespread use of standby letters of credit to finance commodity transactions is the comfort it gives to the seller that it will receive payment.
  19. The drafting of the SBLC/BG should provide that the presentation of a demand would be conclusive evidence that the amount claimed was “due and owing” to the Beneficiary of the SBLC/BG. The beneficiary’s belief that payment was “due and owing” should activate payment.
  20. The meaning of the words “obligated to pay” has to be considered in the context of the certificate to be tendered under the SBLC/BG.
  21. Exceptions to the rule that an issuing bank must pay under an SBLC/BG are limited and difficult to prove. If you have concerns about the reliability of your counterparty, requiring them to provide an SBLC from a reliable bank and governed particularly by English law remains a good way of securing payment.
  22. If you are the beneficiary of an SBLC/BG, you should insist that it contains clear wording to the effect that presentation of a demand by you will be conclusive evidence that the amount claimed will be “due and owing”. In order to rely on the strength of these decisions, you should also ensure that English law governs the SBLC/BG, even if it does not govern the underlying contract.
  23. The great utility of the standby letter of credit is reflected in the fact that it can be used in practically any situation in which one party to a contract is concerned with the other party’s ability to perform. Some of the many ways in which a standby letter of credit can be used are: to ensure payment or performance in construction financing, corporate consolidations, real estate transactions, management contracts, leases on real and personal property, stock transfers and purchases, and bid and performance bonds; to ensure payment of salaries to highly paid individuals such as professional athletes and entertainers; and to ensure payment of professional services such as attorney’s fees.​
  24. The standby letter of credit is neither a contract nor a negotiable instrument and if it is not properly drafted, it will not be considered a guarantee at all. The standby letter of credit or SBLC/BG is a distinct legal instrument, unlike any other. The obligation of the issuer of the SBLC/BG is independent of the underlying contract between the issuer’s customer and the beneficiary of the SBLC. The standby letter of credit enables a businessman to enter into business ventures with minimal fear of loss. By substituting the credit of a third party, usually a bank, for that of the debtor, the businessman can help to protect his investment. Finally, the standby letter of credit is particularly well suited for preventing loss or delay of payment caused by the debtor’s bankruptcy. Because the standby letter of credit and its proceeds are not part of the bankruptcy estate, the beneficiary of a standby letter of credit should receive payment from the bank without delay. The low cost and adaptability to a wide range of business transactions make the standby letter of credit very attractive to the business community and to business lawyers.
  25. ​​Standby letters of credit frequently involve negotiated, complex agreements and larger dollar amounts where lawyers tend to be more involved. Examples include standbys supporting or securing municipal bond issues, construction contracts, subdivision and municipal improvements, commercial real estate leases, equipment leases, cable installations, reinsurance requirements of nonadmitted reinsurers, power purchase contracts, SWAP agreements, securitizations, self-insured retention amounts in insurance fronting arrangements, indemnification obligations for surety bonds, supersedeas bonds to stay execution of a judgment pending an appeal, prejudgment attachments bonds, government contracts or privileges, clearing obligations of brokers and dealers, advance payment guarantees, and open account sales.
  26. Commercial letter of credit customs and practice carry over and are applied to standby letters of credit because standby letters of credit evolved from and have many characteristics in common with commercial letters of credit. Commercial letter of credit customs and practice were established well before standby letters of credit gained usage and popularity. Until 1998, when the International Standby Practices or “ISP”5 was promulgated, almost all letters of credit were issued subject to the Uniform Customs and Practice for Documentary Credits (the UCP).The UCP is specifically geared to examining documents presented in international trade such as drafts, bills of lading, other types of shipping documents, insurance certificates, inspection certificates, commercial invoices, and packing lists. The UCP also provides for the “negotiation” of drafts and documents presented to banks other than issuers that are “nominated” in letters of credit to purchase and present the drafts and documents. Both of these situations—live commercial documents and negotiation of drafts and documents—are seldom relevant to or found in standby letter of credit practice.
  27. ​​The UCP governs standby letters of credit to the extent that its articles are applicable.The UCP does not explain when and how its articles should be applied to standby letters of credit.Even preparing a draft to be presented under a standby letter of credit can present challenges for those who do not have a working knowledge of how banks expect drafts to be worded and presented. Yet every regime that governs letters of credit provides that standard banking practices or international standard banking practices are to be used to determine whether documentary presentations and other aspects of letter of credit transactions are proper and compliant.
  28. Much of the lack of familiarity with or transparency of standby letter of credit practices has been overcome by the International Standby Practices, or ISP. The ISP’s rules specifically address standby letter of credit practice separate and apart from commercial letter of credit practice. The ISP’s rules are well written and for the most part are clear, even-handed, and straightforward. They avoid significant pitfalls of using the UCP in standby letters of credit, such as presentation of stale documents, installment drawings, force majeure, and the requirement that documents and data in documents be consistent. Unfortunately, the UCP is still used in almost half of the standby letters of credit issued in this country and probably in more than half issued by foreign banks in other countries. Additionally, even the ISP’s rules are not all-encompassing. Resort to standard banking practices outside the ISP, caselaw, and the UCC is necessary to fill in the gaps. Finally, there are several rules or provisions of the ISP, the UCP or the UCC that govern standby letters of credit that lawyers and their letter of credit applicant or beneficiary clients may not be familiar with, overlook, or miscomprehend their import. Many letter of credit customs, practices and rules are counter-intuitive and cannot be predicted by resort to simple contract law principles or even other articles of the UCC.1