1. Session Moderator Bruce Glaub Trade Acceptance Group - TAG
Welcome to the May 17, International Credit Executives Group Advanced Standby LC Discussion
Session Moderator
Bruce Glaub
Trade Acceptance Group - TAG

2. Agenda Definition of a Standby Letter of Credit vs Bank Guarantee
Financial vs Performance
Standby Letter of Credit Governing Rules
URDG 758 relative to Bank Guarantees vs Local Law
Structuring counter Standby Letters of Credit to support local issued Bank Guarantee/Auto Renewals/Fees
Canceling Counter Standby Letters of Credit/Bank Guarantee
Examples of different types of credits

3. Definition: Financial and Performance
A promise made by the Issuing Bank that it will be financially liable up to a specified amount for a specific amount of time in the event the client in the contract (typically a supplier) fails to fulfill the contractual obligations.
A Standby Letter of Credit is not intended to be drawn upon as a primary source of payment, drawing should only occur in a situation where the contract has been defaulted on.
Financial covers: promissory notes, open account unpaid invoices, equipment or building lease’s, backing up a loan
Performance cover’s; advance payments, bid bonds, performance bonds, warranty/maintenance bonds.

4. Direct or Indirect/Financial or Performance
There are two ways to issue a Standby Letter of Credit:
Direct-The applicant’s bank issues the Standby LC directly to the beneficiary. A paper LC is sent by the Bank directly to the Beneficiary via courier.
Indirect-The applicant’s bank issues the Standby LC and forward to the “Advising Bank” to be authenticated and then formally advised to the beneficiary.

5. Types of Standby Letters of Credit
Bid/Tender Bonds
Advance Payment Guarantee
Open Account Standby LC
Performance Bond
Warranty Bond
Retention Bond
Counter Guarantees
Industrial Revenue Bonds

6. Bid Bond
Suppliers/Contractors bidding on a project or sale; this assures buyer that the bid will be honored.
Usually issued for a percentage of the contract amount.
Beneficiary can draw if…
Bidder has withdrawn bid
Bidder has failed to enter into a contract
Bidder has failed to establish acceptable performance security
Bidder has failed to pay the service charge

7. Advance Payment/Open Account
Supplier may ask for partial payment upfront from the buyer to cover materials to be used under the contract.
Assurance to the buyer should the supplier default on the contract, the advance payment will be returned to the buyer.
Sometimes issued in conjunction with an export LC.
Beneficiary can draw if supplier does not ship goods or complete project.

8. Performance/Warranty Standby LC
Used to support completion of a contract or as warranty for newly installed equipment.
Beneficiary can draw if terms of the contract/agreement are not satisfied.

9. Guarantee
The terms Standby Letter of Credit and Guarantee are sometimes used interchangeably but are actually very different. Some ways in which a Guarantee differs from a Standby Letter of Credit are:
A guarantee is typically required to be issued by a bank that is local to the beneficiary.
Typically subject to laws of the country of the Beneficiary instead of the accepted rules for Guarantees, URDG 758.
A Gaurantee may or may not contain an expiry date, or the local law may dictate that the obligation continues even after expiry.
Draw requests under a guarantee are investigated by the issuer of the guarantee before payment is made. Non-compliance must be proven.

10. Counter Guarantee
Standby Letter of Credit is issued in favor of an acceptable foreign correspondent bank who will then issue the local Counter Guarantee.
The Counter Guarantee is designed to minimize the risk for the guarantor as much as possible.
It is a specific Beneficiary or a specific country that may require a guarantee.
Always try to negotiate the use of your banks Standby Letter of Credit instead of a guarantee.

11. Risk Under a Guarantee Possibility of No expiry date
Investigation of underlying transaction
Subject to laws of issuing country, which might not be known.
Issues to be aware of:
More difficult to cancel/
Should these be drawn on, documents are not presented to your bank, they are presented to the Foreign Issuing Bank of the guarantee. If they receive the drawing and the request is compliant, they then request payment from the US Issuing Bank, we must honor without being able to check the documents for discrepancies.
Additional fees due to second bank involement
Pay or Extend.

12. Examples ABC Company will export a custom made machine to Egypt.
Beneficiary will only accept a guarantee, issued by a local bank.
ABC Company asks their bank to issue a Standby LC to the Egyptian bank.
The Egyptian Bank will then in turn issue a local guarantee to the buyer, subject to local law.

13. Special Conditions When is an Expiry Date NOT an Expiry Date?
Auto Extend Clause
Non-Extension Notices
3) Amendments

14. Special Condition: When is an Expiry Date not an Expiry Date?
BEWARE!!! Local laws in some countries, even with a stated expiration date, allow the beneficiary to claim under the L/C for a stated period after the expiration date.
In these countries, we suggest the following statements by included in the terms and conditions of your Standby Letter of Credit or Guarantee:
“All demands for payment must be made prior to the expiry date”
“The beneficiary is requested to return this guarantee immediately after the stated expiry date.”

15. Special Condition: “Auto Extension”
An automatic extension clause allowing the Standby Letter of Credit to be issued for a specific initial period (usually one year) with an “automatic” extension
Sample language:
“It is a condition of this Letter of Credit that it will be automatically extended without amendment for a period of one year from the Expiration Date hereof, or any future Expiration Date, unless at least ninety (90) calendar days prior to such Expiration Date, the Issuing bank sends notice to the Beneficiary in writing by courier or swift of election not to extend this Letter of Credit for an additional period.”
Beware:
Providing a non-extend notice may result in a drawing presented by the Beneficiary.

16. Special Condition: Amendments
Amendments which are detrimental to the beneficiary, such as decreasing the amount of the Standby L/C, or shortening the expiry date, require the beneficiary’s approval. If the beneficiary refuses, or if consent is not received, the Letter of Credit terms remain unchanged.

17. Rules governing Standby Letters of Credit & Guarantees
Uniform Customs and Practices (UCP 600)
International Standby Practices (ISP 98)
Uniform Rules for Demand Guarantees (URDG)

18. Governing Rules: UCP 600
•Uniform Customs & Practices for Documentary Credits
•“Backbone” of Letter of Credit Transactions
•Most common, well-established
•Facilitate growth of international trade between counter parties
•Designed for commercial Letters of Credit; also accepted for Standby L/C

19. Governing Rules: ISP 98 •International Standby Practices
•Designed for Standby Letters of Credit
•Reflects generally accepted practices, custom and usage
•Published by ICC and adopted by BAFT/IFSA world wide
•ISP 98 rules used by banks around the world
•Drafted by lawyers:
- Precision of terminology
- Various problematic scenarios

20. Governing Rules: URDG
•A set of rules developed by the International Chamber of Commerce (ICC) and adopted in 2010.
•Establishes agreed-upon rules for independent guarantees and counter-guarantees among trading partners.
•URDG Seldom used

21. Roles:
The applicant
The beneficiary
The bank

22. 1) Applicant Role •Keep the language clear, precise & simple
•Ask the beneficiary to provide their preferred language
•Be aware of pricing and fee structure
•Avoid non-documentary conditions
•Be aware of specific local country conditions/ limitations
•Maintain continuous communication with the beneficiary
•Understand auto-extend provision

23. 2) Beneficiary Role •Understand the auto-extend provision
•Review & understand the time limitations, as well as drawing requirements
•Maintain continuous communication with the applicant

24. 3) Bank’s Role
•Provide precise language in the Letter of Credit-not ambiguous
•Issuing Banks commitment is contingent upon presentation of the stipulated documents within the terms and conditions of the Letter of Credit
•Banks ONLY deal with documents, not the underlying transaction
•The Standby Letter of Credit is a separate instrument, and is independent of the underlying contract

25. Questions
This presentation is for discussion purposes only, notwithstanding anything in this presentation to the contrary, the statements in this presentation are not intended to be legally binding. Any products, services , terms or other matters described in this presentation (other than in respect of confidentiality) are subject to the terms of separate legally binding documentation and/or are subject to change without notice.