For anyone who is not familiar with LCs, an LC is essentially an irrevocable obligation to pay money spent by a bank in favor of a third party at the request of the borrower. There are many types of LCs; However, standby LCs are most often present in financing operations and in revolving subscription facilities. LCs that are ongoing and have not been used by their beneficiaries reduce the obligation available under the loan agreement, as they must be financed by lenders when they are drawn by their beneficiaries. This applies irrespective of whether the borrower was able, on that date, to fulfil the conditions precedent of the loan agreement in question and to take out new loans under the corresponding credit facility. LCs shall be equally proportionate to the collateral and guarantees in support of loans granted under the corresponding credit facility. As a general rule, the LC issuer is not liable (without fraud or gross negligence) for the measures taken in respect of each LC. The borrower assumes any risk of acts or omissions of a beneficiary with respect to the use of an LC. Given the general economic uncertainty in today`s world and recent market turbulence, we have seen private equity funds scramble to maintain and guarantee future liquidity, but at a higher price than before. In this volatile economic context, parties to commercial transactions want more and more certainty about their payment.
If the ordering company does not pay the invoice, it is the bank that issues the accredits that assumes responsibility for the payment of the order. Standby letters have a time limit for use and apply to the same rules as standard letters of credit. Standby letters also require the same qualification procedures as regular letters of credit, although the likelihood of the bank assuming the financing obligations is lower. A letter of reserve from an internationally renowned bank conveys the credibility of the company. With an LC on standby, the borrower can obtain LCs from their lender as a use of an existing LC sub-facility that is part of a larger revolving loan, avoiding the need to acquire a “new” loan or collateral. By granting LC terms at the time of granting the larger loan, the borrower created a trading instrument for future transactions with third parties. Lenders qualify the borrower before issuing a letter and businesses usually receive the letters from the bank, which provides regular financial services to the business. One of the advantages of a trade letter is the regulation by the International Chamber of Commerce of Customs and Practice for Documentary Credits, which controls the conditions of accreditation and payment procedure.
An LC is generally governed by the terms of the credit agreement. As for the process, the borrower simply files an LC application with the administrative officer (within the relevant timeframes required in the loan documents) who then informs the lender(s) of such an LC application. . . .