How Is A Standby Letter of Credit Used In Project Financing?

Standby Letter Bank Collateral for Financing

Being that an Standby Letter (SBLC) is a letter of credit makes it also a negotiable bank instrument. This allows the instrument to be rated and valued and exchanged for consideration. In other words, being a bank instrument not unlike a bank guarantee, the standby letter can then be monetized.

The use of this type of letter of credit is almost altogether separate in purpose and issuance than a traditional letter of credit. Asset holders can leverage their financial holdings by issuing bank instruments like letters of credit and bank guarantees for the purpose of making loans and issuing lines of credit for project financing.

The text or legal verbiage used on the standby letter will likely differ in substance from its use in payments for international trade, but will still keep intact its identity and core functionality as a documentary letter of credit. Once an Issuing bank agrees upon the language of the bank instrument with the Beneficiary bank, the instrument would be issued usually through the SWIFT interbank communication protocols to make the necessary bank guarantees in the delivery process.

SWIFT MT-760 Delivery Standby Letter

The most commonly used SWIFT communication for documentary letters of credit in order to make bank avals and guarantees with full banking responsibility is the SWIFT MT 760. This type of SWIFT communication is considered to be a “full delivery” of the SBLC from one bank’s ledgers to another bank’s ledgers.

By doing this an asset holder can leverage and monetize the financial assets on account with a bank and thus promote project financing through credit enhancement; a process of providing cash collateral security through bank instruments making loans and lines of credit.

Banks can then allow the financing against bank instruments issued from an asset holder on behalf of a beneficiary, which beneficiary constitutes a lender looking to make loans for an applicant seeking project financing.

The applicant approaches both the asset holder and its issuing bank concurrently with the lender beneficiary and its bank. Through a fee-based contract with a service provider the applicant can utilize the asset holder’s banking capability and credit worthiness to fulfill the lender’s security requirements for making a line of credit towards project funding. The standby letter bank instrument may be the primary security or secondary collateral used to make the loan.

The rating of the issuing bank as well as that of the letter of credit itself make up some of the constituents the lending ratios are based on. Other parameters may also include the viability of the project itself, the assets of the project, the assets of the company applicant, and the credit worthiness and financial soundness of the applicants involved.

Comments on Using Leased Standby Letter Bank Instruments

One of the key components to the transaction for the asset holder, or original owner of the cash assets backing the standby letter, is ensuring the applicant is successful in getting a banking undertaking from a top rated and financially sound bank. The bank undertaking makes promises to guarantee the safe return of the instrument upon its contracted term expiry unencumbered and free of any liens.

This may sound easy enough, but most underestimate the willingness of a beneficiary bank to guarantee such a promise on behalf of its borrower unless they feel a) the project is sound, b) there is a sound repayment plan with exit strategies in place for fail safes against potential default, and c) the client has the wherewithal to make extensions on the loan should they be required, and they often are.

The beneficiary does not want to have to return a standby letter bank instrument before the loan is repaid, and like any lender they will go through often exhaustive measures to ensure their risks are minimal or there will be an unwillingness to stand behind the undertaking.

Balboa Trade is an online financial solutions company providing intelligent bank asset resources for Bank Instrument and Proof of Funds Credit Enhancement. Balboa’s credit enhancement programs include cash accounts for proof of funds and bank instruments issued by top world banks through letters of credit and bank guarantees. Additionally, Balboa Trade can provide financing solutions that utilize it’s asset holder’s bank instruments as primary collateral for project funding.

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