Although
some restrictions and conditions apply from one instrument to the next, all standby letters of credit are negotiable bank instruments. 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 LC is almost altogether separate in purpose and issuance than a
traditional import LC. Asset holders can leverage their financial holdings by
issuing bank instruments for the purpose of making loans and issuing lines of
credit for project financing.
How Can It Be Used For Project Financing?
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 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.
The
beneficiary bank cannot return an instrument before the loan is repaid and lien
removed. Like it would be expected of a lender they will go through often
exhaustive measures to ensure their risks are minimal, otherwise there will be
an unwillingness to stand behind the loan undertaking in the first place.
