The use of standby letters of credit in commercial transactions continues to grow. In the case of a commercial letter of credit, it is intended by the parties that the credit under the letter will be drawn in the completion of a transaction. In the case of a standby letter, the credit will be drawn only after some party has failed to meet its obligations. Obtaining a letter of credit in lieu of a cash bond or collateral is viewed with increasing favor by businesses, governments, and the courts. The attractiveness is due to the essential nature of a letter of credit transaction. With a letter of credit, the lender’s credit, rather than the credit of the borrower, is on the line. This provides parties with certain advantages in bankruptcy and greatly increases the probability of ultimate payment.
In underwriting and structuring a standby letter of credit transaction, the lender must keep in mind the fundamental principal that the letter will be drawn, if ever, at the moment of greatest risk in the transaction. By definition, someone has failed to perform and is in default. Therefore, appropriate repayment mechanisms and collateral should be required in order to support the underlying obligation of the lender’s customer to repay the lender if the credit is drawn. The lender may wish to anticipate a rate of interest to be paid on the debt and to indicate repayment terms such as immediately upon demand or amortized over time.
Author: Jason P. Lueking (bio)
Phone: 317.464.1591
email: jlueking@bamberger.com
Tags: commercial transactions, Jason Lueking, line of credit