Lease Securitization - Letters of Credit. What all does the tenant pay?
There seems to be a misunderstanding between my clients banker and my interpretation of what all is entailed in a Letter of Credit from his bank for securitizing a lease. Does anyone have experience with LOC’s and have any clarification? Does the client have to tie up his collateral in a certificate of deposit (CD) or can he keep it liquid in the bank? I was under the impression of the latter.
[{"id": "higx1cq", "text": "Some banks may require a money market lockup, some banks may do a revolving facility but make no mistake the banker is getting paid and sometimes an additional fee for the letter. In large loss sensitive insurance programs with large deductibles sometimes commercial insurance companies require a letter of credit when a $250,000 liability deductible is in an insurance program", "replies": [], "depth": 1}, {"id": "higxp9a", "text": "Client can -likely- (edit here, apologies) keep it liquid in the bank. Bank is vouching for buyer\u2019s creditworthiness/ability to make payment to which letter refers based on assessment of buyer\u2019s assets held by institution/relationship to institution (distinguish: bank holding collateral/escrow of buyer\u2019s assets). \n\nBank -could- theoretically, if not prohibited by regulation/legislation from requiring, require that their customer invest in certain financial products. \n\nMore likely bank may be interested in authoring such a letter for an outstanding customer in terms of servicing loans over time, keeping funds in deposit, investing in financial products, making prompt and not missing payments, never overdrawing, being and referring business to the bank. Surely such a customer\u2019s financial picture is all-but entirely known and understood by bank. Allowing them to find the risk related to the benefit to be worth investing in furthering the financial interests of their great customer, and so their own simultaneously. \n\nIt\u2019s a very fact specific exercise. If a college student with a $500 2yr term CD comes in and asks for a letter of credit to buy a hundred thousand hamburgers, has no income, has no other working relationship with any creditors much less the bank, unlikely they would sign that LOC. On the other hand, a long-standing, collateralized customer even if credit extended thereto is approaching the bank\u2019s legal lending limit may get such a letter. \n\nThink about why a bank would want to draft such a letter and it will make sense. But it is again, outside this very hyperbolic example, exceedingly fact intensive and would not be something unusual for those in a position of institutional governance to put to a vote, at management\u2019s discretion.", "replies": [], "depth": 1}, {"id": "hiiluix", "text": "The bank is going to want those funds restricted in some way (CD, money market with a holdetc.) so there is zero risk of loss to the bank in the event the LC is called. If you have a good relationship with your bank and other loans/services you might be able to get on unsecured or cross collateralized.\n\nThe other issue is the language.  Letters of credit are tripartite agreements with the bank sitting in between the customer and the beneficiaries.  Beneficiaries want evergreen LCs they can for any reason whatsoever with the least notice &amp; documentation while the customer wants the opposite. The more in favor of the beneficiaries an LC is the more risk to the bank &amp; the more likely they will require cash collateral held before they issue one.", "replies": [], "depth": 1}]