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Glossary

SBLC

Category — General Notions
Standby letter of credit (SBLC) - a subtype of letters of credit, a standby letter of credit is an obligation of the bank issuing such a letter of credit, -to pay the amount of money to the beneficiary in case of impossibility to fulfill financial obligations.


Main characteristics:

1. It is widely used in the bond market by issuers to increase the creditworthiness, solvency of the issuer, and it also increases the attractiveness of bonds protected by such a mechanism. It’s highly popular among Chinese issuers.

2. The main need for such letters of credit arises if the issuer issues a bond on the international market, while often the bank that issued such a letter of credit is financially more stable than the issuer itself.

3. The mechanism of work is that the bank, at the client’s request, freezes the funds, which remain as such until the end of the bond’s circulation period. Such funds will be retained by the bank until it becomes necessary to secure the obligation under the bond. Thus the issuer is protected from unforeseen risks associated, for example, with bankruptcy or lack of funds at the moment.


Advantages:

1. It helps the issuer to pay less on the bond’s coupon, since additional collateral always means less risk of default.

2. The presence of an SBLC guarantee from the bank makes the rating of the bond issue optional and automatically ensures the "recognition" of the issue in the international debt market.

3. Compared to more traditional methods of securing obligations, for example, compared to a bank guarantee, as a rule, it is imperatively irrevocable, which does not allow you to refuse a letter of credit at a convenient moment.

4. If the bank fails to fulfill its obligations under the letter of credit, it is liable to both the issuer and the beneficiaries.


Disadvantages:

1. Significant expenses of the issuer for the guarantee service by the bank, which must be taken into account when issuing.

2. The bank may require counter-guarantees in the form of other assets owned by the issuer (for example, shares).

3. A lengthy SBLC approval process - it takes banks from 1 to 3 months, but the process is much faster if a preliminary agreement has already been concluded between the issuer and the bank. Alternatively, if the bank, having information about the issuer’s status, has already provided all the data on in what order and under what conditions will be able to provide a letter of credit.

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