The Mechanics of

International Trade Finance

Unit 4
Specialist Credits

Stephen A Jones
CONTENTS

1. INTRODUCTION ........................................................................................................................ 7

2. OIL CREDITS ............................................................................................................................. 8

2.1 Introduction .......................................................................................................................... 8

2.2 Special Features .................................................................................................................... 8

2.2.1 Amount ..................................................................................................................... 8

2.2.2 Letter of Indemnity (‘LOI’) ........................................................................................ 8

2.2.3 Stale Bills of Lading ................................................................................................... 9

2.3 Shipping Guarantee............................................................................................................... 9

3. REVOLVING CREDITS .............................................................................................................. 11

3.1 Introduction ........................................................................................................................ 11

3.2 Description .......................................................................................................................... 11

3.3 When Used .......................................................................................................................... 11

3.4 Process ................................................................................................................................ 11

3.4.1 Value....................................................................................................................... 11

3.4.2 Time ........................................................................................................................ 12

3.4.3 Cumulative ............................................................................................................. 12

3.4.4 Example .................................................................................................................. 12

3.4.5 Non-cumulative ...................................................................................................... 12

3.4.6 Example .................................................................................................................. 12

3.5 Credit Facility....................................................................................................................... 12

3.5.1 Example .................................................................................................................. 12

3.6 Risk Considerations for the Importer .................................................................................. 13

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 3.7 Risk Considerations for the Issuing Bank ............................................................................ 13

3.8 Benefits to the Exporter ...................................................................................................... 13

4. REINSTATEABLE CREDITS ........................................................................................................ 14

4.1 Introduction ........................................................................................................................ 14

4.2 Description .......................................................................................................................... 14

4.3 When Used .......................................................................................................................... 14

4.4 Credit Facility....................................................................................................................... 14

4.4.1 Example .................................................................................................................. 15

4.5 Benefits for the Importer .................................................................................................... 15

4.6 Risk Considerations for the Issuing Bank ............................................................................ 15

4.7 Benefits to the Issuing Bank ................................................................................................ 15

4.8 Risks to the Exporter ........................................................................................................... 15

5. TRANSFERABLE CREDITS......................................................................................................... 16

5.1 Introduction ........................................................................................................................ 16

5.2 When Used .......................................................................................................................... 16

5.3 Credit Facility....................................................................................................................... 16

5.4 Limitations........................................................................................................................... 16

5.5 Changes on Transfer............................................................................................................ 17

5.6 Process ................................................................................................................................ 18

5.7 Amendments ....................................................................................................................... 19

5.8 Document Substitution ....................................................................................................... 19

5.9 Compliance Due Diligence................................................................................................... 20

5.10 Benefits to the Middle Party ............................................................................................... 20

5.11 Disadvantages to the Middle Party ..................................................................................... 20

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 5.12 Benefits to the Transferring Bank ....................................................................................... 21

5.13 Risk Considerations for the Issuing Bank ............................................................................ 21

6. BACK TO BACK CREDITS .......................................................................................................... 22

6.1 Introduction ........................................................................................................................ 22

6.2 Description .......................................................................................................................... 22

6.3 When Used .......................................................................................................................... 22

6.4 Process ................................................................................................................................ 22

6.5 Credit Facility....................................................................................................................... 24

6.6 Structuring a Back to Back Credit Facility ............................................................................ 24

6.7 Master Credit ...................................................................................................................... 24

6.7.1 Credit Available With Any Bank by Negotiation ..................................................... 25

6.8 Counter Credit ..................................................................................................................... 26

6.9 Facility Agreement .............................................................................................................. 27

6.9.1 Master Credit ......................................................................................................... 27

6.9.2 Counter Credit ........................................................................................................ 27

6.10 Risk Appreciation for the ‘Counter Bank’ ............................................................................ 27

6.11 Disadvantages for the Middle Party .................................................................................... 28

6.12 Benefits to the Middle Party ............................................................................................... 28

7. SYNTHETIC CREDITS ............................................................................................................... 30

7.1 Introduction ........................................................................................................................ 30

7.2 Process ................................................................................................................................ 30

7.3 Risk Considerations ............................................................................................................. 31

8. RED CLAUSE CREDITS ............................................................................................................. 32

8.1 Introduction ........................................................................................................................ 32

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 8.2 When Used .......................................................................................................................... 32

8.3 Pre-shipment Loan .............................................................................................................. 32

8.4 Pre-shipment Drawing ........................................................................................................ 33

8.5 Credit Facility....................................................................................................................... 33

8.6 Risk Considerations for the Applicant ................................................................................. 33

8.7 Risk Considerations for the Issuing Bank ............................................................................ 34

8.8 Benefits to the Beneficiary .................................................................................................. 34

9. GREEN CLAUSE CREDITS ......................................................................................................... 35

10. NON-BANK ISSUER CREDITS ................................................................................................... 36

10.1 Introduction ........................................................................................................................ 36

10.2 Credit Facility....................................................................................................................... 36

10.3 Risk Considerations for the Beneficiary .............................................................................. 36

10.4 Benefits to the Non-bank Issuer.......................................................................................... 36

11. SUMMARY AND CONCLUSION ................................................................................................ 37

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Unit 4 – Specialist Credits 5

Disclaimer

This distance learning course is intended for global use and cannot, therefore, be specific on the
application or provisions of a country’s law and how this will impact the transaction, security or
financing. Because of the potentially significant impact that different laws can have as the goods,
documentation and money flow from one country to another, specialist legal advice should be taken.
Applicable law should be consulted to identify governing rights and liabilities.

The course director accepts no responsibility or liability for the example wordings and documents
appearing within this distance learning course. The examples shown are purely for illustration
purposes and do not represent legally approved wordings. Legal advice should be taken on the
interpretation and construction of documentation, commercial agreements, credit facility
documentation, terms and conditions and their incorporated wordings. Examples shown in this
course are the subject of copyright and must not be copied or used.

The case studies, exercises, assignments and document examples within this course are simulated
and the named parties and transactions appearing therein are entirely fictitious. These do not
purport to represent any actual party or transaction, and any similarity to the names of actual
persons, entities, transactions or activities, past, present or future is purely coincidental.

Unit 4 – Specialist Credits 6

1. INTRODUCTION
Welcome to Unit 4.

In this unit we shall examine the use, and the mechanics of specialist types of letters of credit. These
follow the key principles and operation of standard letters of credit described in Unit 3, but have
been adapted to provide a solution for a given set of circumstances or requirements.

As we saw in Unit 3, a documentary letter of credit is a conditional undertaking to pay issued by the
bank of the importer. Payment or the issuance of an undertaking to pay is triggered by the
presentation of complying documents.

The specialist types of credit that we shall examine in this unit equally provide the same undertaking
and are also usually governed by the UCP rules. In the case of transferable credits, they have their
own additional article which describes the changes that are allowed on transfer.

Unit 4 – Specialist Credits 7

2. OIL CREDITS
2.1 Introduction
These are standard letters of credit which have adapted the terms and conditions to reflect the oil
and petrochemical industry in which they are used.

2.2 Special Features

We shall begin by looking at some of the special features often seen in oil-related letters of credit.

Please click on the ‘Oil Letter of Credit Document’ within your online pack of materials to view an
example of a petrochemical-related letter of credit.

2.2.1 Amount

In the trade of oil and petrochemical products, the price payable for the goods may not always be
fixed at the time of LC issuance. For example, the price may be determined at a specified future date
or event, such as on discharge from the vessel.

Letters of credit which cover the shipment of oil and petrochemical products, therefore, often
provide flexibility in the value that may be drawn, sometimes on an unlimited basis. In the case of
the latter, this has significant credit risk exposure liability for the issuing bank who cannot quantify a
value at the time of issuance. This would only be allowed for importers of undoubted credit quality.

It is more likely that the amount that may be drawn will be capped by a specified tolerance as shown
in the following clause example.

Clause Example

47A The letter of credit amount will be automatically adjusted to the invoice value without further
amendment to the documentary credit. The maximum amount is not to exceed US$22,852,157.

2.2.2 Letter of Indemnity (‘LOI’)

Ordinarily, when a producer or trader wishes to sell cargo which is on the high seas, they will need
possession of the original bills of lading so that they may be passed on to the buyer or presented
under a letter of credit. This is to enable the importer to present an original bill of lading to the
carrier for release or discharge of the cargo.

It is not uncommon for petrochemical products to be traded several times while at sea. In some
cases, the sale of the ship’s cargo may require replacement bills of lading to be issued by the carrier
which reflect the change in details, such as a revised port of discharge. The carrier will often need
the old bills of lading returned to them prior to reissuance of the ‘switch’ replacements; all of which
takes time.

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Delay in receipt of the original bills of lading from the carrier or a previous seller would ordinarily
mean that the trader would not be able to present complying documents under the letter of credit to
obtain payment until such time as they became available. This would delay the receipt of payment
or result in a discrepant presentation of documents under the LC (without the bills of lading) being
rejected with no payment at all.

Because the flow of the bill of lading will often, therefore, lag behind the trade, an interim document
called a letter of indemnity (‘LOI’) will be used. In order that the trade can be effected and payment
collected, despite the absence of the original bills of lading, the letter of credit may provide the
beneficiary with the option of presenting an LOI instead of the bills of lading.

The LOI will provide the undertaking of the seller to provide the original bills of lading as soon as they
become available and compensate the importer should the delay or subsequent non-receipt of the
bills of lading result in costs, damages or cause financial loss.

When the seller is of high credit quality and integrity, they will issue the LOI. Otherwise, the LOI will
need to be issued or countersigned by the seller’s bank thus providing their financial engagement
and undertaking that the terms of the LOI will be duly honoured.

In some cases, the letter of credit will provide the precise form of wording for the LOI.

Please now click on the ‘Letter of Indemnity Document’ within your online pack of materials to view
an example of an LOI presented under an oil-related credit.

2.2.3 Stale Bills of Lading

A letter of credit will often stipulate that documents must be presented no more than a specified
period after the date of shipment. When original bills of lading are required under the letter of
credit, and the LC is silent on the presentation period, UCP supplements this by stating that these
must be presented within 21 days from the date of shipment.

As we saw in Section 2.2.2, receipt of the bills of lading might be delayed and thus may be received
outside of the period allowed for presentation under the letter of credit. In this case, the
presentation of documents will be discrepant. This means that there is every likelihood that the
vessel will have already arrived at the port and discharged its cargo. In this event the bills of lading
are said to be ‘stale’.

In recognition of this, oil related credits may contain provision that bills of lading received later than
21 days after the date of shipment, but within the validity of the credit, and stale bills of lading are
acceptable.

2.3 Shipping Guarantee

As we saw in Section 2.2.2, an oil or petrochemical related credit may allow the beneficiary to
present an LOI in place of the original bills of lading when these are not available at the time of
presentation.

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Whilst this provides the indemnification of the seller, and possibly their bank to hold the importer
harmless due to the non-availability of the bills of lading at the time of vessel readiness for discharge,
the importer will not ordinarily be able to obtain release or discharge of the cargo without
possession of the original bills of lading.

As discussed in Unit 1, this is because one original bill of lading is usually required to be presented to
the carrier by the named consignee, endorsee, or holder of a bill of lading consigned ‘to order’ (and
endorsed in blank) for release of the cargo. This condition will be stated in small print on the face of
the bill of lading or required by custom or applicable law.

Without the original bills of lading, the importer will need to apply to their bank for the issuance of a
shipping guarantee. This provides indemnification to the carrier for the release of the cargo to the
importer without presentation of an original bill of lading.

Under the terms of the guarantee, the issuing bank (guarantor) undertakes to compensate the
carrier and hold them harmless should another party subsequently present an original bill of lading
for release of the cargo (which has already been released to the bank’s client).

Please now click on the ‘Shipping Guarantee Document’ within your online pack of materials to view
an example of a guarantee issued to obtain release of the goods when the original bills of lading are
not available.

There may also be occasions where the presenter of the original bill of lading is not the named
consignee or endorsee, or the details of the bill of lading show a different discharge port. Again, in
these circumstances, the carrier will require a shipping guarantee to release the cargo.

The bank that issues the guarantee will need to mark a credit limit for the guarantee value against
their client. The guarantee will sometimes be in the standard wording of the bank incorporating a
maximum liability value and date of expiry, and sometimes in the form of wording required by the
carrier; in which case it may not be limited to value or time.

The bank will need to be as certain as they can that their client is the rightful legal owner of the
goods or has been given rights of possession by the legal owner. Risk is reduced when the missing
bills of lading are consigned to the bank’s client because only they have the right to present the bill of
lading to the carrier.

Whilst this does not remove the risk of fraudulent endorsement or conversion, it reduces the
likelihood of presentation by another party and potentially provides some recourse against the
carrier for an unauthorised release.

Unit 4 – Specialist Credits 10

3. REVOLVING CREDITS
3.1 Introduction
These letters of credit are standard in form but contain a clause which automatically reinstates the
original value of the credit. The basis of reinstatement or revolvement is specified within the terms
of the credit.

3.2 Description
A revolving letter of credit provides the irrevocable undertaking of the issuing bank to automatically
restore the amount of the letter of credit to its original value once it has been used, or the amount
refreshed periodically (i.e. each month), without the requirement for amendment.

Whilst favoured by exporters because it provides an irrevocable commitment to revolve during the
life of the letter of credit, it carries significant implications for the importer and issuing bank.

3.3 When Used

If there are a series of shipments for like goods and value to be made over a given period, either a
letter of credit can be issued for the full value of the aggregate sum of the shipments, or one that
revolves in value or time automatically.

This removes the need to issue separate letters of credit for each shipment. It also provides
consistency in the terms and conditions because all of the shipments are covered by the same letter
of credit, but where the value is reinstated in accordance with the terms of the credit.

3.4 Process
The terms of the credit will specify the basis upon which it will be automatically reinstated (revolve)
in value; this will be by value or by time.

3.4.1 Value

When the credit revolves by value, the amount available to be drawn is automatically reinstated in
accordance with the terms of the credit, for example after each drawing. It is customary to apply a
maximum aggregate value to which the credit will revolve up to, or the maximum number of times it
will revolve.

Without such limit, the beneficiary could keep on shipping goods and drawing under the revolving
credit as many times as they wish during its validity period. In this case, the maximum amount of
liability for the bank at the time of issuance would be unquantifiable.

Example LC Clause

47A The value of this revolving letter of credit will be reinstated automatically to its full value
without amendment upon each drawing, subject to a maximum amount of US$4,500,000.

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3.4.2 Time

When the credit revolves by time, it is automatically reinstated after each period, for example each
month. This will be expressed to be either ‘cumulative’ or ‘non-cumulative’.

3.4.3 Cumulative

A credit that revolves on a cumulative basis carries forward any amount not utilised during the
preceding period and adds this value to that available in the new period. Unless there was any
specified schedule of shipments stated in the letter of credit, the exporter could, in theory, ship all of
the goods in the final month. This risk would need to be considered by the importer.

3.4.4 Example

A letter of credit is issued which revolves each calendar month for US$50,000. If a drawing is not
made in June, a cumulative credit will carry the unused US$50,000 to July. In July, the amount that
can be drawn will now be US$100,000. This is the new value of US$50,000 for the month of July plus
the amount not used in June.

3.4.5 Non-cumulative

A non-cumulative revolving credit does not carry forward any unutilised amount to the new period.
The undrawn value is, therefore, lost.

3.4.6 Example

If the credit is issued on a non-cumulative revolving basis, the US$50,000 not used in June, would be
lost. The amount available in July would, therefore, just be the reinstated value of US$50,000.

3.5 Credit Facility

Because the amount of a revolving credit is reinstated automatically, without amendment or
intervention by the issuing bank, the value that is recorded against the bank credit facility at the time
of LC issuance is the full aggregate sum that will be available to the beneficiary over the whole period
of the letter of credit.

3.5.1 Example

If the LC is issued for US$50,000 and this is to revolve each month for a period of one year (i.e. 12
times) then a bank liability of US$600,000 will be recorded by the issuing bank at the time of raising
the LC (being 12 x US$50,000).

This is because the issuing bank is not able to cancel or alter the letter of credit once issued. They
have provided their irrevocable commitment to make the credit available for 12 automatic
reinstatements of US$50,000 each.

The issuing bank must record the maximum possible amount of credit exposure against their client,
the applicant. The calculation of the initial facility requirement is not affected by whether the credit
is cumulative or non-cumulative.

Unit 4 – Specialist Credits 12

The amount recorded against the applicant’s credit facility will reduce as the letter of credit is
utilised. In the case of a non-cumulative credit, the liability will also reduce should any of the amount
in its allotted period not be used.

3.6 Risk Considerations for the Importer

Revolving credits carry a high risk for the applicant. The initial facility requirement is for the
maximum aggregate potential utilisation value. If the applicant changes their mind or wishes to
cancel the revolving letter of credit because they are dissatisfied with the goods received, they
cannot unless the beneficiary agrees.

Because of their independence, even if the commercial contract is breached and voided, the
revolving letter of credit will remain available for utilisation and revolvement.

3.7 Risk Considerations for the Issuing Bank

The issuing bank is irrevocably committed to automatically reinstate the letter of credit value in
accordance with its terms. It cannot, therefore, exit this commitment should the financial status of
the applicant deteriorate during the validity period of the credit.

It is very important that the issuing bank caps or limits their ultimate monetary liability by either
specifying the maximum number of reinstatements or aggregate value that may be drawn in total.

3.8 Benefits to the Exporter

A revolving credit is attractive for the exporter because it provides a guaranteed amount of money
that can be drawn for ongoing/multiple shipments. When the goods are the same for each shipment
it also reduces the risk of getting the documents wrong on the second and all subsequent
presentations because the requirements for each will be the same.

If separate letters of credit were issued for each shipment, and by different banks, the documentary
terms would vary. This is because no two banks have exactly the same clauses and conditions within
their LCs. The documentary conditions would thus differ from one bank to another resulting in a
greater risk of discrepancy.

Unit 4 – Specialist Credits 13

4. REINSTATEABLE CREDITS

4.1 Introduction

These letters of credit are standard in form but contain a clause which states the intention of the
applicant to arrange the reinstatement of the original value of the credit, by amendment, up to an
aggregate total sum. The major difference to a revolving credit is that reinstatement of value is by
amendment only and is not automatic.

4.2 Description

This is a standard letter of credit which states an intention, without commitment, by the issuing bank
on behalf of the applicant, to restore the amount of the letter of credit to its original value once it
has been used, up to an aggregate total sum, by amendment.

4.3 When Used

A reinstateable credit will be used when the exporter requires just one letter of credit to cover a
series of shipments for like goods and value over a specified period of time, but the applicant and/or
the issuing bank wish to limit the amount of their risk exposure.

Whilst this removes the need to issue separate letters of credit for each shipment and, therefore,
provides consistency in the terms and conditions (because all of the shipments are covered by the
same letter of credit), there is no obligation on the part of the applicant to issue an amendment to
reinstate the value, nor indeed any obligation for the issuing bank to accept the amendment request.

Example LC Clause

47A The value of this letter of credit is reinstateable by amendment. Whilst it is the intention of
the applicant that the amount of this credit will be reinstated up to a maximum aggregate
value of US$4,500,000 this will be subject to the receipt by ourselves as issuing bank of an
amendment request from the applicant in an acceptable form and our consideration of such
request at that time.

Please note that this credit does not convey any commitment on the part of ourselves as
issuing bank, to reinstate the value.

4.4 Credit Facility

Because the amount is not reinstated automatically, but only by amendment, the value that is
recorded against of the bank credit facility at the time of LC issuance is the amount made available
for drawing at that point in time.

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4.4.1 Example

For example, if a reinstateable credit is issued for US$50,000 and the stated intention is for this to be
reinstated by amendment each month for a period of one year (i.e. 12 times) then a credit facility of
US$50,000 will be recorded at the time of LC issuance (being 1 x US$50,000), and not for the
aggregate value.

This is because the issuing bank may reject an amendment request from the applicant and refuse to
reinstate the value of the credit.

4.5 Benefits for the Importer

There is no obligation to reinstate the credit. If the applicant is not satisfied with the goods, they can
withhold their amendment instruction to the bank.

4.6 Risk Considerations for the Issuing Bank

Many banks refuse to issue this type of credit because they fear it may mislead the beneficiary into
thinking that it provides a commitment to reinstate the value up to the intended aggregate amount,
which it does not.

The applicant may refuse to provide their reinstatement amendment instruction to the issuing bank,
or the issuing bank may refuse to accept the amendment request and not reinstate the LC.

The reinstatement clause, therefore, needs to be expressed very clearly. Whilst the issuing bank’s
credit risk exposure is limited and manageable, reinstateable credits may carry a reputational risk
exposure.

4.7 Benefits to the Issuing Bank

Because the credit is reinstateable only by amendment, the bank’s credit exposure is limited to the
issued value of the credit, and not the intended aggregate amount. If the financial status of the
applicant deteriorates, the issuing bank may refuse to accept an amendment instruction from the
applicant and thus limit their liability exposure to the current value of the credit.

4.8 Risks to the Exporter

The exporter has no certainty that the credit will be reinstated and, therefore, cannot rely upon the
intended aggregate value becoming available to them. It is important, therefore, that they do not
commit to goods procurement or manufacture beyond the value made available to them at any point
in time.

Unit 4 – Specialist Credits 15

5. TRANSFERABLE CREDITS
5.1 Introduction
A letter of credit which is stated to be ‘transferable’ can be transferred in whole or in part:

• by the beneficiary, known as the ‘1st beneficiary’;

• to one of more suppliers, known as ‘2nd beneficiaries’.

5.2 When Used

This is used by a middle party who wants to use the letter of credit it has received from the end
buyer as a mechanism to pay one or more end suppliers who require a letter of credit for the
provision of the goods.

Sometimes, the middle party will not be able to obtain the necessary credit facility from its bank to
issue a letter of credit to the end supplier. It may, therefore, seek a transferable letter of credit from
its customer, the end buyer.

5.3 Credit Facility

When the middle party is able to use and pass on the transferable letter of credit to the supplier of
the goods, this removes a requirement for a credit facility.

This is because the bank that is effecting the transfer, known as the ‘transferring bank’, is passing on
the credit it has received, albeit bearing some limited changes permitted by the UCP rules and/or the
terms of the credit; it is not issuing its own letter of credit.

5.4 Limitations
A transferable credit does not suit all transactions as the terms and conditions of the transferred
portion must accurately reflect those of the credit prior to transfer with the exception of the
permitted changes. It may only be used when the commercial terms (other than the price and unit
value) are the same on both sides of the transaction, i.e. the purchase and sale.

Furthermore, a middle party may not wish to request a transferable letter of credit from the end
buyer because this will reveal their status as a middle party and thus disclose that they are not the
actual supplier (the end buyer will be paying a higher price for the goods when purchased via a
middle party).

The currency value, payment term, Incoterms® rule, and documentation must match on both sides
of the purchase and sale transaction. The goods must also be shipped direct by the end supplier to
the required country of destination. If the middle party is to intervene by repackaging the goods, or
adding value in their adaptation, assembly or manufacture, a transferable credit will not work.

This is because one letter of credit is being used for the whole transaction. Whilst certain changes to
the letter of credit are permitted by UCP, these are limited, as described in Section 5.5. Sometimes
the credit will allow further changes to accommodate a particular set of requirements.

Unit 4 – Specialist Credits 16

Upon receipt of a transfer request, the bank will consider whether it is prepared to effect the
transfer. Under the UCP rules, a bank is not obliged to transfer the credit unless it is happy to do so.

Due diligence will be required on the transferee party or parties (2nd beneficiaries). Having agreed
to the transfer request, the bank will usually require their transfer fee to be paid before
implementing the transfer of the credit.

A letter of credit may only be transferred to more than one 2nd beneficiary if the credit allows partial
drawings or shipments to be made. Once transferred, it cannot be transferred by the 2nd
beneficiary.

Documents must be presented by the 2nd beneficiary to the transferring bank.

Please now click on the ‘Transferable Letter of Credit Document’ within your online pack of materials
to view an example of a transferable credit.

5.5 Changes on Transfer

UCP Article 38 allows certain changes to be made to the credit. These are as follows:

• Name of the original LC applicant can be replaced by the name of the 1st beneficiary on the
transferred letter of credit.

• Value on the transferred credit can be reduced and any stated unit price so that the middle party
(1st beneficiary) may substitute their own invoice and make a profit.

• Days allowed for presentation of documents may be reduced.

• Latest shipment date can be made earlier.

• Expiry date can be made earlier (calculated in accordance with the revised latest shipment date
and presentation period).

• Percentage for which insurance must be effected may be increased to provide the amount of
cover as stipulated in the credit (prior to transfer).

• A request for transfer must also indicate whether amendments may be advised to the 2nd
beneficiaries or whether such amendments need to be authorised for transfer by the 1st
beneficiary.

No other changes are permitted unless specifically authorised by the letter of credit.

Please now click on the ‘Request for Transfer Document’ within your online pack of materials to view
an example of an instruction to transfer the credit.

Unit 4 – Specialist Credits 17

5.6 Process
We shall now examine the process of a transferable letter of credit. This is shown in Figure 1.

Unit 4 – Specialist Credits 18

 Figure 1

Please now click on the ‘Transferable LC Process Video’ within your online pack of materials and I
shall talk you through the process and mechanics of transferable credits.

5.7 Amendments
Rejection of an amendment by one 2nd beneficiary does not invalidate the acceptance of the
amendment by another 2nd beneficiary. In the case of the 2nd beneficiary agreeing to the
amendment, their transferred portion of the credit will be amended accordingly.

For any 2nd beneficiaries that reject the amendment, the transferred credit will remain unchanged.

5.8 Document Substitution

The 1st beneficiary has the right to substitute its own invoice (and draft if any) for those of the 2nd
beneficiary in an amount which is not in excess of that stipulated (and remaining available) within
the credit.

Upon such substitution, and subject to a complying presentation of documents by the 2nd and 1st
beneficiary, the 1st beneficiary can draw under the credit for the difference between its invoice and
that of the 2nd beneficiary.

Unit 4 – Specialist Credits 19

If the 1st beneficiary fails to provide its substituting invoice (and draft where applicable) on first
demand (or fails to correct any discrepancies it may contain), the transferring bank has the right to
present documents as received from the 2nd beneficiary to the issuing bank.

5.9 Compliance Due Diligence

Whilst a transferable credit is a legitimate and useful tool for the middle party, it carries high
compliance risk, i.e. risk of money laundering and/or sanctions violation. This is because at the time
of raising the transferable credit, the issuing bank is not aware of who the credit will be transferred
to.

Furthermore, the names of the end buyer of the goods and end supplier may not be divulged in the
terms of the credit. These may be masked by the use of neutral third parties, such as goods
consigned to a freight forwarder.

This is because the middle party will wish to protect their position by keeping the name of the end
buyer and end supplier away from each other when this is commercially sensitive. If the end buyer is
able to go direct to the end supplier, they will be able to source the goods at a lower price, removing
the profit margin of the middle party.

When the issuing bank has nominated a bank to act as the transferring bank it will require, as a
minimum, to be notified immediately at the time of transfer of the names of the 2nd beneficiaries.
In this case, the issuing bank is reliant upon the transferring bank undertaking an appropriate level of
due diligence on the 2nd beneficiaries prior to transfer.

A safer option is to restrict transfer to the issuing bank only or require the transferring bank to
inform the issuing bank of the names of the 2nd beneficiaries and to obtain their approval prior to
transfer. This enables the issuing bank to undertake their own due diligence prior to authorising the
transfer.

5.10 Benefits to the Middle Party

The transfer of the credit does not require a credit facility with the transferring bank. The middle
party is, therefore, able to offer its suppliers a letter of credit, where otherwise it may not due to a
lack of bank credit facilities.

The middle party is able to realise its profit margin by the simple substitution of its draft and invoice
with those of the 2nd beneficiary (via the transferring bank).

5.11 Disadvantages to the Middle Party

A transferable credit can only be used in the circumstances described in Section 5.4. Because only
limited aspects can be changed on transfer, it may not be suitable for the transaction.

The request for a transferable credit will alert the end buyer that they are dealing with a middle
party and thereby will be paying more than if they were able to source the goods direct from the end
supplier.

The transferring bank is not obliged to transfer the credit.

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The transfer fee is ordinarily payable prior to transfer. On large value credits, this fee may be
significant and beyond the ability of the middle party to pay.

Some middle parties prefer not to use a transferable LC because there is a greater chance of the two
end parties being disclosed to each other and dealing direct in the future without the middle party’s
involvement. Whilst the terms of the credit will seek to mask or prohibit the provision of price, unit
values and the name of the end supplier and end buyer, this cannot be guaranteed.

The middle party is reliant on the ability of the end supplier to present complying documents under
the transferred portion of the credit. This is because all the documents presented, other than the
draft and invoice, will be used in the presentation under the original terms of the credit. If they did
not comply on the transferred portion of the credit, they will not comply under the original credit
terms.

Failure of the 1st beneficiary to substitute its invoice when requested will allow the bank to present
the 2nd beneficiary’s invoice for the lower amount to the issuing bank, divulging the name of the end
supplier and actual cost of goods to the 1st beneficiary.

5.12 Benefits to the Transferring Bank

The bank is able to assist the middle party, where otherwise it would not be able due to credit
constraints.

The transferring bank is able to generate fee income in the form of a transfer fee without incurring
credit liability on the middle party.

5.13 Risk Considerations for the Issuing Bank

There is a higher risk of money laundering and/or sanctions violation when compared to a standard
documentary credit, as discussed in Section 5.9.

Unit 4 – Specialist Credits 21

6. BACK TO BACK CREDITS
6.1 Introduction
The term ‘back to back credits’ refers to a type of trade finance facility where a bank takes a letter of
credit received by its client, the middle party for the sale of goods, as a form of collateral for the
issuance of a separate letter of credit for the purchase of those goods.

6.2 Description
The form of credits used in a ‘back to back’ arrangement are standard letters of credit.

However, for descriptive purposes, the letter of credit received by the middle party from the end
buyer’s bank is referred to as the ‘master credit’ and that issued by the bank of the middle party to
the end supplier as the ‘counter credit’. These names do not appear within the credits.

I shall refer to the bank that issues the master credit as the ‘master bank’ and the bank of the middle
party that issues the counter credit as the ‘counter bank’.

It should be noted that there are no special provisions within UCP for back to back credits as there is
no such thing as a back to back LC – only separate standard letters of credit that have been issued on
a ‘back to back’ arrangement.

6.3 When Used

This type of facility is used when a middle party is purchasing goods from an end supplier by letter of
credit and selling those same goods to an end buyer also by letter of credit, and the financier
requires a structured facility to provide the required credit support.

It enables a middle party to use the incoming ‘master’ LC from the end buyer as comfort to their
bank for the issuance of a separate letter of credit to the end supplier. Typically used by a middle
party when:

• a transferable LC will not work (where the currency, payment term, Incoterms® rule and
documents do not match on the purchase and sale side of the transaction);

• the goods are not being shipped direct to the final place of destination; or

• the middle party does not wish to ask the end buyer to raise a transferable credit because of
commercial sensitivity.

6.4 Process
We shall now examine the process of the back to back credit operation. This is shown in Figure 2 on
the following page.

Please now click on the ‘Back to Back Letter of Credit Process Video’ within your online pack of
materials and I shall talk you through the mechanics of back to back credits.

Unit 4 – Specialist Credits 22

 Figure 2

Unit 4 – Specialist Credits 23

6.5 Credit Facility
Whilst the counter bank can seek to use the proceeds of the master credit as its source of primary
reimbursement for the settlement of its counter credit, it should not be considered as security.

This is because the receipt of proceeds under the master credit relies upon:

• the complying presentation of documents;

• the credit quality of the issuing bank; and

• the economic and political status of their country.

The full value of the counter credit issued by the middle party’s bank (counter bank) must, therefore,
be recorded against a credit facility in the name of the client.

6.6 Structuring a Back to Back Credit Facility

Whilst the provision of back to back letters of credit can be a significant revenue-earner for a bank,
particularly when fees are charged in line with risk (e.g. charging a proportion of the profit that will
be earned by the middle party rather than taking published standard fees), some banks do not
provide this type of facility.

This is because expertise is required to structure the terms of the master and counter credits to
reduce risk.

The terms of the counter credit must be structured to align, as much as possible, with the
documentary terms of the master credit. The closer they match, the lower the risk. For example,
where the only difference between the counter and master credit is the currency and price, and thus
the only substituting documents are the draft and invoice, this minimises risk.

Where the counter bank is also the confirming bank of the master credit they will be interpreting the
documents on a consistent basis on both sides of the transaction; if the documents comply with the
counter credit, the documents will also comply under the master credit (subject to the substitution
of complying draft and invoice by the middle party).

We shall now look in turn at the structuring of the master and counter credit and the key
requirements of the facility. This assumes that the middle party wishes to prevent disclosure of the
names of the end buyer and end supplier to protect their commercial position.

6.7 Master Credit

To enable the counter bank to control the flow of documentation and monies, it ought to be the
nominated bank on the master credit, preferably with instructions to add their confirmation.

Because the counter bank is relying on the master credit as their primary source of reimbursement
for the counter credit, they will need to record their risk exposure to the master bank and country
against internal credit limits.

Unit 4 – Specialist Credits 24

Where the bank is requested to add their confirmation, the credit should provide an acceptable
bank-to-bank reimbursement clause which gives authority to debit the issuing bank’s account held
with the confirming bank (where held and in the same currency of the credit) or to claim on a named
reimbursing bank where authority to do so is not dependent on the issuing bank’s receipt and
examination of documents at their counter.

The amount of the master credit will be greater than the counter credit enabling the middle party to
derive a profit from the transaction.

The proceeds of the master credit will be assigned to the counter bank and the original of the master
credit held by them.

The following terms will be required in the master credit:

• Place of expiry to be the counter or country of the counter bank.

• Documents other than the draft and invoice must not show the amount or unit price of the goods.

• Applicant’s name must not be required on any document except the draft and invoice.

• Manufacturer’s or exporter’s name must not be required on any document (other than draft and
invoice).

• For sea shipment, a full original set of clean shipped on board marine bills of lading consigned to
order blank endorsed showing the shipper and notify party as the middle party or a freight
forwarder (i.e. a neutral party).

• Third party documents are to be allowed, to include draft and invoice. These may show a third
party as the shipper, consignee and notify party; this is to enable the presentation of the end
supplier’s documents under the master credit on a complying basis should the middle party not
provide its substituting (and complying) documents, i.e. draft and invoice.

• Insurance to be arranged by the middle party outside the terms of the credit.

• When shipments are to be made in instalments, UCP 600 Article 32 must be excluded (allowing
the credit to remain available if any shipment is missed).

• Period allowed for document presentation must be a minimum of 21 days from the date of
shipment.

6.7.1 Credit Available With Any Bank by Negotiation

If the master credit is made available with any bank by negotiation, this makes it even more
important that an original of the credit is held by the counter bank.

This is because an original of the credit will be required to accompany the presentation of
documents; if it is held and retained by the counter bank, this will prevent the middle party
presenting documents to another bank.

Unit 4 – Specialist Credits 25

The confirmation instructions in the master credit must state ‘may add’. If the master credit is
advised to the middle party by another bank, the ‘may add’ instruction will allow the counter bank to
add their confirmation upon request of the middle party when the credit is handed to them, thus
preventing the advising bank from automatically adding their own confirmation when they receive
the master credit from the issuing bank.

6.8 Counter Credit

The following terms will be incorporated within the counter credit:

• Availability restricted to the counters of the issuing bank (counter bank).

• Place of expiry to be the counter or country of the counter bank.

• Amount and unit price to be lower than the master credit providing profit opportunity for the
middle party.

• Documents other than draft and invoice must not show value, unit prices, the name of the
manufacturer or the name of the exporter/beneficiary (end supplier).

• For sea shipment, a full set of original clean shipped on board marine bills of lading consigned to
order blank endorsed showing the shipper and notify party as the applicant (middle party) or
freight forwarder are required (the stipulated requirements must match precisely those contained
in the master credit).

• Documents other than the draft and invoice must be made out in the name of the applicant
(middle party) or made out in a neutral name such as a freight forwarder.

• Insurance to be arranged by the applicant (middle party) outside the terms of the credit.

• Latest date of shipment to be a minimum of 15 days earlier than that in the master credit. This
builds in a buffer for late shipment between the requirements of the counter and master credit.

• Document presentation period must be a maximum of 10 days after the date of shipment (and/or
ideally 10 days shorter than that under the master credit). This allows time for document
substitution and presentation under the master credit and any resubmission of corrected
documents.

• Date of expiry to be earlier than the master credit (calculated by the revised latest date of
shipment plus days allowed for presentation of the documents).

The documents and data required for presentation under the counter credit must be described
exactly as they appear in the master credit.

Ideally, the payment term of the counter credit should be later than that of the master credit. This
removes the need to fund settlement of the counter credit before receipt of discount proceeds
under the master credit.

Unit 4 – Specialist Credits 26

6.9 Facility Agreement
The facility agreement should contain the provisions detailed in the two sub-sections below.

6.9.1 Master Credit

Draft documents, to include any third party specimen documents must be provided to the counter
bank by the middle party 15 days prior to shipment for pre-examination and approval prior to the
creation and presentation of the originals under the master credit (this will require close liaison
between the middle party and end supplier).

Any amendment acceptance or rejection must be made only with the prior written approval of the
counter bank.

Undertaking by the middle party to only present documents via the counter bank and to specify in
their covering letter accompanying the documentary presentation that proceeds are to be credited
to the designated account of the counter bank.

6.9.2 Counter Credit

Any documents required to be issued and presented by the middle party under the master credit (i.e.
substituting documents) to be held by the counter bank in an incomplete form, signed by the middle
party, together with a power of attorney authorising the bank to complete the documentation on
their behalf for presentation under the master credit. This documentation is to be held prior to
issuance of the counter credit.

In the event of a discrepant presentation under the counter credit, the counter bank will reject the
documents and refuse to accept a waiver of discrepancies from the middle party. The middle party
will be required to liaise with the end supplier and arrange a representation of corrected and
complying documents or obtain an amendment to the master credit which will render the counter
credit discrepant documents complying with the amended terms of the master credit, within a
specified period (such as three business days).

This will make the position, process and outcome of a discrepant presentation under the counter
credit clear to the middle party. This places the burden on the middle party at the outset to ensure
that documents comply by working closely with the end supplier to perfect these, or to obtain the
necessary replacement documents, or amendment under the master credit within the timescale
stipulated within the facility agreement.

6.10 Risk Appreciation for the ‘Counter Bank’

If the documentary terms and conditions of the master and counter credits do not match with each
other, there is a risk that documents presented under the counter credit comply and the counter
bank has, therefore, to pay but the same documents do not comply with the master credit.

If the discrepant documents are rejected by the master bank, the counter bank will not receive its
primary source of counter credit reimbursement. The counter bank will, therefore, need to rely on
their right of recourse to the middle party, who is unlikely to have the financial resources to repay
them.

Unit 4 – Specialist Credits 27

Whilst discrepant documents presented under the counter credit can enable the middle party’s bank
(‘counter bank’) to reject the documents and refuse payment, thus protecting their position (even if
the middle party instructs the counter bank to waive discrepancies), this will usually cause friction
and relationship damage between the middle party and counter bank.

This is because the bank’s rejection will prevent the transaction from progressing and thus fail to
produce the anticipated profit for the middle party.

6.11 Disadvantages for the Middle Party

Whilst the structuring of the back to back transaction will assist in the counter bank’s control of the
trade documentation and payment flow, the master credit will not be considered as security, but as
comfort only. A credit facility will still be required for the value of the counter credit in the name of
the middle party.

The middle party relies upon the end supplier presenting complying documents under the counter
credit.

The generation of profit for the middle party relies upon the complying presentation of documents.
This is largely outside the control of the middle party because the documents, other than the
substituting invoice and draft are produced by the end supplier and/or third parties in the supplier’s
country (i.e. shipping, insurance and inspection documentation).

This is because the shipping documents and any other third party documents presented by the end
supplier, other than their draft and invoice, will be used by the middle party for presentation under
the master credit.

A discrepant presentation under the counter credit will be rejected by the counter bank because this
will also result in a discrepant presentation under the master credit. The middle party will thus not
be able to conclude the transaction and will not receive their profit.

6.12 Benefits to the Middle Party

A back to back credit facility may allow a middle party who has only limited financial resources to
purchase goods from a supplier who is only prepared to supply on LC terms.

Can be used where the end buyer of the goods is willing to issue an LC in favour of the middle party
but not a transferable credit.

It is less likely that the end buyer will be alerted to the fact that their supplier is a middle party or
trader. When requesting a transferable credit, the middle party is divulging that they need to
transfer the credit to the actual supplier of the goods and thus the end buyer will be paying more for
the goods than if they were able to purchase direct.

Using separate letters of credit rather than a transferable credit can accommodate a wider range of
transactions where the commercial terms are not matching on the purchase and sale.

Subject to the terms and availability of the counter and master credit, these can be negotiated or
discounted in the usual way to accelerate receipt of proceeds for the end supplier and middle party
(as each is a standard documentary credit).

Unit 4 – Specialist Credits 28

Please now click on the ‘Back to Back LC Structuring Exercise Document’ within your online pack of
materials and attempt to structure the terms of the master and counter credit.

When you have completed the exercise please click on the ‘Back to Back LC Structuring Solution
Video’ for the answer.

Unit 4 – Specialist Credits 29

7. SYNTHETIC CREDITS
7.1 Introduction
A synthetic, or ‘structured’, credit is a standard letter of credit which is used for purposes other than
the primary settlement of a trade transaction.

These are used principally by large commodity companies as a funding vehicle or to maximise
interest or investment return through the arbitrage of the differential in interest rates between
countries.

7.2 Process
An example of the use of a synthetic credit is provided below.

In Figure 3, the group head office wishes to maximise the return on their cash resources. This is best
achieved by investing the money on a medium-term basis of one year. However, the group is
acquisitive and also wants to be able to use their cash if the right opportunities arise for further
acquisitions of other companies or the purchase of commodity producing assets.

In this example, the use of a synthetic credit enables the group to maximise the interest received on
their cash resources but also releases the majority of these funds for their immediate use.

Unit 4 – Specialist Credits 30

 Figure 3

7.3 Risk Considerations

Opinions vary on the use of synthetic credits. Some banks are prepared to issue these because they
are used by global companies of high-credit status and integrity, and thereby argue that the bank is
not at risk. Whilst this may be true, for others the use of a trade instrument for purposes of financial
engineering sit uncomfortably.

There is also a risk that a regulator may take exception to the use of a trade instrument for the
purposes of financial engineering.

If synthetic credits were to be used by companies of lesser status, they would present a risk of
money laundering or fraud. This is because they will typically call for copy trade documentation only,
and which is separate from the use and purpose of the letter of credit.

This copy documentation could facilitate the drawing under multiple letters of credit using the same
copy documentation for the purpose of facilitating flows of illicit monies.

Unit 4 – Specialist Credits 31

8. RED CLAUSE CREDITS
8.1 Introduction
A red clause credit allows the exporter (beneficiary) to draw a specified loan or LC drawing in
advance of shipment against a simple receipt or certificate. This will usually be accompanied by its
undertaking to repay the sum advanced or drawn in the event of non-shipment or presentation of
discrepant documents which are rejected. The pre-shipment loan or drawing is typically between
20% and 60% of the total credit value. The red clause credit is so named because the pre-shipment
financing clause used to be written in red ink.

8.2 When Used

The exporter requires an advance or loan of monies prior to shipment of goods and the presentation
of shipping documents. This is often required to pay for the procurement or manufacture of goods
and/or to cover freight costs.

8.3 Pre-shipment Loan

The red clause credit is generally structured so that the nominated bank provides a loan to the
beneficiary in accordance with the terms of the credit. Interest accrues during the period of the loan
at a specified interest rate and basis of calculation. This is either chargeable to the beneficiary or
applicant in accordance with the terms of the letter of credit.

When the shipment is made and documents presented for the full drawing value, the pre-shipment
loan will be deducted from the amount payable to the beneficiary. The principal amount of the loan
is thus recovered from the proceeds of the letter of credit. When interest, fees and charges are
payable by the beneficiary these will also be deducted.

If shipment is not made, or the documents presented are discrepant and rejected, the nominated
bank will demand reimbursement of the loan, accrued interest, fees and charges from the issuing
bank. The issuing bank is obliged to reimburse the nominated bank and will recover the total
amount claimed by debit to the applicant’s bank account.

Example LC Clause

47A This is a red clause letter of credit. The beneficiary may draw up to 30% of the value of this
credit as a red clause advance upon presentation of their simple receipt accompanied by their
written undertaking to effect shipment and present documents in accordance with the credit
terms to the negotiating bank within the validity of the credit.

The amount of such advance is to be deducted from the proceeds of the draft drawn under this
credit upon negotiation of shipping documents. Therefore, the beneficiary will only be paid for
the amount negotiated after the advance made under the red clause is fully recovered.

The amount of each drawing must be endorsed on the reverse of the credit.

Unit 4 – Specialist Credits 32

8.4 Pre-shipment Drawing
Alternatively, the letter of credit may contain mixed payment details which allow the beneficiary to
draw part of the value of the credit prior to shipment and the balance on subsequent presentation of
shipping documents.

No interest is generally payable, because the nominated bank is not providing a loan; the beneficiary
is utilising part of the credit prior to shipment by presentation of the stipulated document(s). The
nominated bank will claim reimbursement from the issuing bank at the time of payment in
accordance with the terms of the credit.

This differs to a pre-shipment loan where the nominated bank reimburses themselves by retaining
part of the drawn value of the LC (typically on shipment).

For example, 30% may be drawn against simple receipt, and the balance of 70% drawn against the
subsequent presentation of shipping documents.

Example LC Clause

47A 30% of the letter of credit is payable at sight against presentation by the beneficiary of the
following document:

A certificate confirming order acceptance and placement and undertaking to refund the full
amount of US$176,756 or part thereof on a pro rata basis should the letter of credit expire
totally or partially unutilised for any reason or documents are rejected by reason of
discrepancy(ies).

8.5 Credit Facility

The applicant will require a credit facility with the issuing bank for the full value of the letter of
credit. Additionally, where a pre-shipment loan is allowed under the letter of credit for the full value
of the LC, the bank may also add the anticipated interest payable on the loan to the LC amount
recorded against the credit facility.

This is to ensure that the LC issuing bank’s maximum risk exposure is recorded against their client,
the applicant should the shipping documents not be presented under the LC or discrepant
documents are rejected. In this case, the nominated bank will demand repayment of the loan plus
interest from the issuing bank.

8.6 Risk Considerations for the Applicant

The applicant is at risk as it will be debited with the drawn amount of the ‘red clause’ advance of
monies, plus accrued interest and fees where no shipment is made, or a discrepant presentation is
rejected. The applicant is thus providing the equivalent of an unsecured loan to the beneficiary, via
the nominated bank.

Unit 4 – Specialist Credits 33

Where a pre-shipment stage drawing is allowed, the applicant will similarly face financial loss if the
goods are not shipped by the beneficiary or discrepant documents are not taken up.

If the goods are not shipped, or discrepant documents are rejected, or the goods received do not
conform, the applicant’s only recourse is to the beneficiary though legal process outside of the
credit.

8.7 Risk Considerations for the Issuing Bank

The issuing bank is obligated to reimburse the paying bank for the pre-shipment loan or drawing
irrespective of whether complying shipping documents are subsequently presented.

The issuing bank is not, therefore, able to take into its credit risk assessment the security value of the
goods purchased, as these may never be shipped.

The amount of the pre-shipment loan or drawing must be appraised solely on the applicant’s ability
to repay the bank, which may include loan interest in the circumstances described in Section 8.5.

8.8 Benefits to the Beneficiary

It provides a form of pre-shipment finance which may not otherwise be available from their own
bank.

The loan does not require the beneficiary to have a credit facility with the LC nominated bank (the
provider of the loan) because the bank is recording credit risk exposure against the issuing bank from
whom they ultimately rely for reimbursement.

Unit 4 – Specialist Credits 34

9. GREEN CLAUSE CREDITS
A green clause letter of credit is similar in nature and function to the red clause credit described in
Chapter 8, but with the important difference that the credit requires the presentation of a document
providing control over goods, such as a warehouse receipt. Subject to applicable law, security can be
taken over the offered goods and liquidated to repay the pre-shipment loan in case of need.

Green clause credits are thus used as part of a structured form of financing, often related to
commodity pre-export finance.

Because the pre-shipment loan is secured by recourse to goods in the event of default (i.e. failure to
repay the loan in the case of non-shipment or a rejection of discrepant documents), the loan is often
for a higher percentage of the LC value, such as 80%.

Unit 4 – Specialist Credits 35

10. NON-BANK ISSUER CREDITS
10.1 Introduction
These are letters of credit where a non-bank entity, usually the finance or treasury division of the
applicant, provides its own undertaking to make payment to the LC beneficiary.

The irrevocable conditional undertaking to pay is, therefore, that of the non-bank entity rather than
the bank which has raised the letter of credit. The banks used to transmit the credit are appointed as
agent of the non-bank issuer for SWIFT messaging and the examination of documents in accordance
with the UCP rules.

Typically raised by a large corporate who does not wish to utilise its banking credit facilities. This
may be because they are of very high credit status or they are in a leveraged state and, therefore, do
not have available capacity in their banking lines.

10.2 Credit Facility

Because the bank is acting only in the capacity of a processing agent, they bear no financial
engagement or responsibility. A credit facility is not, therefore, required by the non-bank issuer
entity.

Please now click on the ‘Non-Bank Issuer Letter of Credit Document’ within your online pack of
materials to view an example of a credit issued by the finance department of the applicant.

10.3 Risk Considerations for the Beneficiary

The beneficiary only has the payment undertaking of the non-bank issuer entity, which may be of
poor credit quality or highly leveraged.

Whilst the credit is issued subject to the UCP rules, the bank is acting as the agent of the non-bank
issuer with resultant uncertainty and lack of clarity on the governance of these rules.

If the non-bank issuer is part of the same organisation as the applicant, there is a risk of manipulation
or influence over the take-up of the documents or payment, particularly if the goods are
subsequently found not to conform to the requirements of the applicant.

10.4 Benefits to the Non-bank Issuer

A bank credit facility is not required for the issuance of these credits.

Unit 4 – Specialist Credits 36

11. SUMMARY AND CONCLUSION
I hope you have enjoyed this unit on specialist credits. We have discussed the use, mechanics, risk
considerations and benefits of the various types of letters of credit available.

In the next unit we shall look at the use, operation, risk and structuring of demand guarantees and
standby credits.

It is now time to check what you have learned and that you are ready to move on to the next unit. If
you are not currently online, you will need to log in and take this unit’s test. It will be found listed
below the name of this unit on the website.

If you get a question wrong, don’t worry! You can go back into the relevant section of the unit and
revise the information before trying again. The questions will be in a different order, and may
contain some new questions, and the answer options may be rearranged, so please keep this in
mind! You can have as many attempts as you need to pass the test before moving on to the next
unit.

Just a reminder to ask me a question or seek clarification when you are in any doubt. I am here to
help!

Unit 4 – Specialist Credits 37