Why It’s Tough to Find a Lender to Post Collateral for Your Letter of Credit
Why Securing a Collateral Provider for Your Letter of Credit Can Be Challenging
Seasoned market participants know that a standby letter of credit (SLOC) often hinges on a third party supplying cash collateral. Prospective providers regularly decline because immobilising liquidity reduces return on capital. When risk-free instruments yield close to 5 % per annum, a request to lock up funds for a modest standby fee appears unattractive.
1. Opportunity Cost of Capital
Assume a provider has USD 10 million available. Three-month U.S. Treasury bills currently yield roughly 5 %. The same USD 10 million generates about USD 500 000 annually without credit risk and with same-day liquidity. Offering a 1 % standby fee on your transaction competes directly with that baseline return while adding documentation requirements, onboarding procedures, and drawdown exposure.
Illustrative Transaction
• Requirement: USD 25 million SLOC covering a petroleum cargo.
• Structure: USD 10 million in cash collateral; remaining exposure secured by the cargo at origin.
• Collateral placement: Cash is held in a segregated account invested in rolling three-month U.S. Treasury bills.
• Economics:
- T-bill income ≈ USD 500 000 per year (5 % on USD 10 million).
- SLOC fee = 1 % on USD 25 million → USD 250 000.
- Total annual return ≈ USD 750 000, or 7.5 % on the posted cash.
By retaining Treasury exposure while the funds are pledged, the provider meets internal yield targets and still supports the applicant’s financing requirement.
2. Preferred Destinations for Short-Term Liquidity
- Short-dated U.S. Treasuries and agency floaters.
- Overnight repurchase agreements with primary dealers.
- Prime money-market funds offering next-day settlement.
- High-grade commercial paper with an active secondary market.
These alternatives deliver competitive yields while preserving immediate access to cash—features absent when funds are tied to a standby facility.
3. Structural and Reputational Considerations
- Extensive legal documentation (ISP 98 or URDG 758), often across multiple jurisdictions.
- Credit and performance risk if the applicant defaults and the issuer draws the collateral.
- Reputational risk associated with adverse press coverage should a trade fail.
4. Specialist Collateral Providers
A limited group of lenders concentrate on collateral posting. Their portfolios already include SLOC-backed transactions in trade finance, energy offtake, and infrastructure. Incremental, well-structured opportunities complement existing deal flow and support balance-sheet utilisation targets.
Financely operates a platform that:
- Pre-screens each submission to ensure financial statements, business plans, and drawdown mechanics are complete.
- Introduces applicants to collateral providers with prior commitments in comparable sectors.
5. Banks Accepting Partial Cash Cover
Selected banks agree to SLOCs secured by a cash margin as low as 10 % when the applicant demonstrates strong free cash flow, unqualified audit opinions, and a longstanding relationship with the issuing institution. These facilities typically include tight covenants and ongoing monitoring.
6. Preparing a Compelling Proposal
- Supply audited financials, a detailed cash-flow model, defined draw triggers, and a clear repayment path.
- Demonstrate a track record with comparable assets or trade cycles.
- Leverage a specialist marketplace—such as Financely—to approach institutions active in collateral placement.
Connect with Collateral Providers
Submit your transaction on the Financely platform. Qualified opportunities are distributed to providers that maintain capital earmarked for SLOC support. Decision timelines typically range from five to ten business days.
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