SBLC Factsheet
SBLC Factsheet
Asset-Backed SBLC/BG
- SBLC/BG are either "Fresh Cut" (newly created) or "Seasoned" (existing).
- Issued for a term of 1 year and 1 day, extendable at the provider’s discretion.
- Used as secure instruments for financing and guarantees.
Primary Market Transactions
- Banks issue SBLC/BG to customers with sufficient liquidity or credit lines.
- Direct bank-client transactions are considered “Primary Market”.
- Common misconception: “Banks do not issue SBLC/BG”.
Secondary Market Transactions
- Providers include hedge funds, private equity, and collateral managers.
- Providers use their cash assets to "cut" SBLC/BG via issuing banks.
- SBLC/BG can be leased or sold for investment returns.
Compliance and Issuance
- SBLC/BG must comply with ICC/URDG 758 and UCP 600 protocols.
- Issued via SWIFT (MT-760) from provider’s bank to beneficiary’s bank.
- Accompanied by a bespoke Collateral Transfer Agreement (CTA).
Fraud and Misunderstandings
- Fraudsters exploit rushed deals and lack of hard copies.
- Scammers pose as offshore banks without proper licensing.
- Legal compliance ensures the validity of SBLC/BG.
Monetization of SBLC/BG
- Banks monetize owned/purchased SBLC/BG, not leased ones.
- Private monetizers may fund leased SBLC/BG under specific terms.
- Monetized instruments are used in trade or PPP platforms.
Credit Analysis
- Banks assess creditworthiness using liquidity and solvency ratios.
- The five C's: credit history, capacity, capital, conditions, collateral.
- Due diligence ensures minimal default risk.
Utility of SBLC/BG
- Used to secure payments in contracts and financing.
- Ensures performance in corporate, real estate, and trade transactions.
- Offers bankruptcy protection to beneficiaries.
Legal and Regulatory Framework
- SBLC/BG must comply with local banking laws.
- English law is often preferred for security and clarity.
- Independent from the underlying contracts they support.
Drafting Considerations
- Clear wording ensures payment claims are honored.
- Must state that demands are conclusive evidence of amounts due.
- Proper drafting avoids disputes and ensures enforceability.
Commercial and Standby LC
- Standby LC evolved from commercial letters of credit practices.
- Uses ISP and UCP for document presentation standards.
- Combines the benefits of both credit types for flexibility.
Fraudulent Practices
- Entities issuing SBLC/BG without licenses are illegitimate.
- Ratings do not justify non-compliance with banking laws.
- Beware of fraudulent offshore banks and unregulated issuers.
Geopolitical Limitations
- Eurozone banks often avoid instruments from specific countries.
- Issues with monetizing instruments from Latin America or China.
- Preference for banks with strong credit ratings and compliance.
Negotiated Agreements
- Common in high-value contracts like municipal bonds or leases.
- Involves lawyers and complex terms for security.
- Ensures clarity in obligations and rights.
Banking Practices
- ISP rules improve transparency and reduce risks in SBLC/BG.
- Standard banking practices govern compliance checks.
- ISP offers clear guidelines specific to standby letters of credit.
Customs and Practices
- Customs from commercial LCs apply to standby LCs.
- ISP rules address specific issues like stale documents and risks.
- Ensures seamless use in business transactions worldwide.