5 Things to Know Before Hiring an Advisory Firm to Secure an SBLC

What to Check Before You Hire an SBLC Advisory Firm

Companies usually approach an SBLC advisory firm because a lender, supplier, project counterparty or financing institution requires additional credit support. The assignment sounds straightforward: identify an acceptable provider, arrange issuance and coordinate the standby letter of credit with the beneficiary bank.

The actual mandate involves several independent approvals. The underlying transaction has to pass due diligence. A collateral provider has to accept the exposure. An issuing bank has to approve issuance. The beneficiary has to accept the issuing bank and instrument wording. If the SBLC supports financing, the lender still performs its own underwriting.

Financely advises companies seeking standby letter of credit arrangements, including credit enhancement, collateral transfer structures and transaction-specific bank instrument requirements. Before retaining any advisory firm for this work, there are five issues worth understanding.

1. An Advisory Firm Does Not Issue the SBLC

A legitimate advisory mandate separates the adviser from the issuing institution. The SBLC itself must be issued by a bank or other institution legally capable of issuing the required undertaking.

The adviser's role is transaction structuring, provider sourcing, bank coordination, documentation management and execution support. Where a collateral transfer is required, the adviser may identify a provider with suitable credit or collateral capacity and coordinate that provider with an issuing bank.

The distinction matters because a company should know exactly which party performs each function. The mandate should identify the adviser as adviser, the collateral provider as principal to the collateral arrangement and the issuing bank as issuer of the standby undertaking.

A credible adviser should also be willing to state that bank approval remains independent. No advisory agreement can compel a bank to issue an instrument before its internal credit, compliance and documentation requirements have been satisfied.

2. The Underlying Transaction Has to Survive KYT

An SBLC request is not evaluated solely on the basis of the requested face amount. Banks and collateral providers need to understand why the instrument is required and what obligation it supports.

A USD 10 million standby supporting a defined acquisition financing facility presents a different risk from a USD 10 million standby requested without an identified lender, beneficiary or repayment source. The same applies in trade finance. A standby supporting a documented commodity purchase cycle can be reviewed against contracts, counterparties, logistics and expected cash flows. A request based only on a promise that the SBLC will later be "monetized" leaves material transaction questions unanswered.

Expect a serious advisory firm to request enough information for Know Your Transaction review, including:

• the intended beneficiary;
• the underlying financing or commercial agreement;
• the required SBLC face amount;
• the purpose of the instrument;
• the required tenor;
• the supported obligation;
• the expected source of repayment;
• the jurisdictions involved;
• the identities of material transaction counterparties; and
• the relevant transaction documentation.

The provider and issuing bank will also run their own KYC, AML, sanctions and transaction review. Advisory underwriting does not replace bank underwriting.

3. The Beneficiary Bank Should Be Part of the Structure Early

One of the more expensive mistakes in an SBLC transaction is arranging an instrument before confirming whether the intended beneficiary will accept it.

Financing institutions have their own issuer criteria. They review the issuing bank's jurisdiction, credit standing, correspondent relationships, instrument wording, governing rules, presentation requirements and sometimes the precise branch through which the standby will be issued.

The final wording also needs to correspond with the obligation being supported. A lender providing a loan against an SBLC will usually require language different from a supplier receiving a standby as payment security under a commercial contract.

For many financial standbys, the parties will also determine whether the instrument should be expressly subject to ISP98, whether partial drawings are permitted, where presentation must occur and what documentary statement triggers payment.

A competent advisory firm coordinates this discussion before the transaction reaches issuance. It should not treat delivery of an MT760 as the only objective if the instrument is unusable for the intended financing.

4. Understand Every Fee Before Signing the Mandate

An SBLC transaction can involve several separate cost categories. They should not be collapsed into one unexplained percentage.

The advisory firm charges for underwriting, structuring, provider sourcing, transaction preparation and coordination. The collateral provider may charge a separate premium for making its balance sheet, collateral or credit facility available. The issuing bank charges for establishing the standby. External counsel charges for legal documentation. Advising, confirmation, amendment and correspondent banking charges may arise separately.

The engagement letter should state what the adviser is being paid to do and when its fee is earned. Separate third-party expenses should be identified as third-party expenses rather than represented as part of the adviser's own fee.

Financely provides paid SBLC advisory and transaction structuring services. Our role includes assessing the transaction, coordinating the required workstreams and identifying appropriate counterparties where the mandate passes underwriting.

5. Ask What Happens If the SBLC Is Drawn

This is where many superficial discussions about "leased SBLCs" fall apart.

Assume a collateral provider causes a bank to issue a USD 10 million standby in favor of a lender. The lender advances funds to the recipient. The recipient later defaults. If the lender presents a complying demand and the issuing bank honors USD 8 million, the collateral provider or its banking facility now carries that loss unless another party has a reimbursement obligation.

Definitive documentation therefore needs to address reimbursement, indemnification and security. The recipient may provide a corporate reimbursement undertaking, an assignment of financing proceeds, account control, receivables security, asset security or another agreed package depending on the transaction.

The economics of the collateral transfer fee also depend on this risk allocation. A provider accepting genuine non-recourse exposure should price the transaction differently from a provider whose exposure is secured by a strong reimbursement package.

What an SBLC Advisory Mandate Should Cover

The scope should correspond with the actual work required to reach issuance. For a transaction that starts with incomplete documentation, the engagement may involve substantially more than introducing a collateral provider.

A full mandate can include:

• initial transaction underwriting;
• assessment of the required SBLC structure;
• KYC and KYT coordination;
• collateral provider identification;
• issuing bank coordination;
• beneficiary bank coordination;
• data-room preparation;
• coordination with specialist banking and finance counsel;
• review of draft instrument wording;
• management of conditions precedent;
• issuance coordination; and
• support through the underlying financing closing.

The client remains responsible for providing genuine underlying transaction documents. Advisers and lawyers can prepare financing documentation and organize a data room. They cannot create a purchase contract, financing commitment, invoice, project agreement or other commercial evidence that does not exist.

Red Flags in an SBLC Advisory Proposal

Certain propositions deserve additional scrutiny. A firm claims that any company can obtain an SBLC without underwriting. The issuing bank is kept secret until after a substantial transfer. A provider refuses to disclose its legal identity before definitive documentation. The transaction relies on screenshots of SWIFT messages rather than authenticated bank-to-bank communication. A promised financing amount is based solely on the SBLC face value despite the absence of a committed lender.

Another warning sign is a structure that ignores the underlying transaction. Legitimate banks care why the instrument is being issued. A party that insists the commercial purpose is irrelevant is describing a process that does not resemble institutional bank underwriting.

Requests involving purported "private placement programs," guaranteed weekly returns, unexplained monetization chains or instructions to move money through unrelated third-party accounts require particularly careful scrutiny.

Documents to Prepare Before Hiring an SBLC Adviser

A company with a well-developed file will move through initial underwriting faster and receive a more useful assessment of the transaction.

The initial package should include, where applicable:

• certificate of incorporation and constitutional documents;
• ownership and beneficial ownership information;
• recent financial statements;
• the underlying financing or commercial contract;
• beneficiary details;
• required SBLC amount and tenor;
• proposed use of proceeds;
• repayment source;
• lender term sheet where the SBLC supports financing;
• available draft SBLC wording; and
• material project or transaction documents supporting the request.

Hiring Financely for an SBLC Mandate

Financely works with companies that have an identifiable commercial requirement for a standby letter of credit and need assistance structuring the transaction, sourcing appropriate counterparties and coordinating execution.

We review the requested face amount, beneficiary, underlying obligation, transaction documents, repayment structure and jurisdictions before determining whether the mandate is suitable for our platform. Where additional preparation is required, our scope can include data-room work and coordination of legal documentation with specialist counsel.

Clients looking for broader credit-enhancement structures can also review our credit enhancement advisory services.