Letter of Credit Monetization, or discounting, is a sophisticated financial mechanism that leverages instruments like letters of credit, alongside project finance or trade finance documents including off-take agreements, to secure liquidity.

This process is often misunderstood, surrounded by misconceptions about its legitimacy and application. It's imperative to understand that this financial strategy is entirely legitimate, provided there is a clear, underlying transaction and a genuine need for the monetization.

The essence of LC Monetization demands not only a valid motive behind seeking immediate capital but also stipulates a structured plan for the repayment of the advanced funds.

Example of LC Discounting Scenario

Consider a company engaged in the manufacturing of renewable energy equipment that has secured a contract to supply solar panels to a foreign buyer.

The contract stipulates payment via a Letter of Credit issued by the buyer's bank. To initiate production, the company requires upfront capital for raw materials and labor.

Through LC discounting, the manufacturer approaches a financial institution like Financely, presenting the LC and off-take agreement as collateral to obtain the necessary funds.

The financial institution evaluates the LC, the solvency of the issuing bank, and the credibility of the off-take agreement, then provides an advance of 80-90% of the LC value for LCs issued by established banks or up to 50% for those issued by NBFCs.

This advance enables the manufacturer to commence production immediately, with a commitment to repay the advanced funds upon the completion of the contract and the realization of payment under the LC.

Financely's Monetization and Discounting Services

Financely specializes in monetizing and discounting LCs, accommodating those issued by both established banks and Non-Banking Financial Companies (NBFCs).

Our services are tailored, offering Loan to Value (LTV) ratios of 80-90% for LCs from established banks.

For NBFC-issued LCs, LTV can reach up to 50%, dependent on the issuer's solvability and the client's specific transactional needs. This strategic financial service empowers clients to efficiently utilize their credit instruments for financial agility.

Types of Letters of Credit Discounted

Financely focuses on discounting various types of LCs, including:

• Commercial LCs: Facilitate transactions between buyers and sellers.
• Standby LCs: Serve as a safety net for payment failures.
• Revolving LCs: Support continuous deliveries over time.
• Transferable LCs: Allow the original beneficiary to allocate some or all of the credit to another party. (Also known as back-to-back LC).

The Utility of LC Discounting

LC discounting is pivotal for companies requiring immediate funding to enhance cash flow, invest in growth, or manage operational costs. This financial maneuver converts LCs into cash before maturity, providing a vital liquidity boost. Companies leverage this service to navigate through financial constraints efficiently, ensuring continuity and growth.

Fee Structure and Transaction Process

• Origination Fee: Ranges from US$50,000 to US$300,000, payable upon term sheet signature.
• Success Fee: An additional 2.5% of the monetization proceeds is retained upon transaction completion.

These terms are established to ensure transparency and equity in all dealings.

Closing Procedure

Detailed Closing Procedure for LC Monetization with Financely

Initiation by Client:

• The client initiates the process by expressing interest in LC Monetization services. This is usually done through a formal request for a quote, providing preliminary details of the LC to be monetized, including issuer, value, and intended use of funds.

Term Sheet Issuance:

• Within 24 hours of the request, Financely drafts and issues a comprehensive term sheet. This document outlines the proposed terms of the monetization, including Loan to Value (LTV) ratios, applicable fees, and any preliminary conditions. The term sheet serves as a foundation for the agreement, allowing the client to review and assess the terms.

Approval and Payment of Retainer:

• Upon reviewing the term sheet, the client signifies approval by formally accepting the terms presented. Following acceptance, the client is required to wire the retainer fee within five business days. This fee is part of the origination costs and is necessary to proceed to the operational stages of the monetization process.

Operational Steps:

• Creation of a Special Purpose Vehicle (SPV): Financely establishes an SPV specifically for this transaction. The SPV serves as a separate legal entity to hold the LC and manage the monetization process, providing an added layer of security and structure to the transaction.
• Opening a Bank Account: A bank account is opened in the name of the SPV. This account will be used for the transaction's financial flows, including receiving the retainer, handling the monetized funds, and disbursing the client's proceeds.
• Receiving the Collateral: The client transfers the LC to the SPV as collateral for the monetization. This step involves verifying the authenticity and validity of the LC with the issuing bank.
• Discounting at the Receiving Bank or Creating a Debt Offering: Depending on the nature of the LC and the client's needs, Financely either proceeds with discounting the LC at the receiving bank or creates a debt offering secured by the LC. This step involves negotiation with financial institutions or investors to agree on the terms of discounting or investment.

Fund Disbursement:

• Upon successful completion of the operational steps, the funds are disbursed to the client. This involves deducting Financely’s fees, including the success fee, from the monetization proceeds. The remaining funds are then transferred to the client’s designated account, providing the liquidity sought through the monetization process.

Final Notes

Throughout this detailed procedure, Financely ensures transparency, efficiency, and compliance. All steps are conducted under strict adherence to relevant security agreements and covenants, establishing a secure and legally compliant framework for LC Monetization.

This meticulous approach guarantees that our clients receive the financial utility they seek from their credit instruments with confidence and clarity.