24 Export Letters of Credit L.B. Importer Company, Brazil, arranges to purchase 100 television sets from H.K. Exporter Corporation, New York City. The transaction begins with a sales agreement which includes a requirement that the $25,000.00 purchase price be payable at “sight” under a confirmed Letter of Credit. L.B. Importer Company then requests that its bank, Banco de Sugar Loaf, Rio de Janeiro, Brazil, issue an Irrevocable Letter of Credit, to be advised and confirmed by Citibank, New York. Illustration 8 on page 25 illustrates the type of instru- ment which Citibank would provide to the Beneficiary, H.K. Exporter Corporation. The next step is for H.K. Exporter Corporation to ship the goods and present a $25,000.00 draft along with the specified documents to Citibank, New York on or before the expiration date of the Letter of Credit. Once Citibank examines the documents and determines that they comply with the Letter of Credit, payment is made without recourse to H.K. Exporter Corporation. Citibank then forwards the documents to the Brazilian bank which examines them, reimburses Citibank, and obtains payment from, and releases the documents to, the Brazilian importer. Import Letters of Credit Illustration 9 on page 26 illustrates an import transaction. In this case Citibank in New York is the Issuing Bank, having issued the Letter of Credit for the account of the U.S. importer. Citibank’s Tokyo branch is the Advising Bank. The Letter of Credit is freely negotiable. The Japanese Beneficiary (exporter) of the Letter of Credit may have the draft negotiated by Citibank’s Tokyo branch or another bank in Japan. As a result, the exporter receives funds (typically on a “with recourse” basis) after presenting complying documents. The Japanese Negotiating Bank will, in turn, forward the draft and documents to Citibank, New York. If the documents comply, Citibank will charge its customer, the U.S. importer (Applicant), for the value of the draft and simultaneously pay the Japanese Negotiating Bank and release the documents to the U.S. importer. If the documents do not comply, Citibank may, in its sole discretion, contact its customer for approval of the specific discrepancy or discrepancies or for a general authorization to pay. If customer approval is granted and Citibank itself also agrees to waive the discrepan- cies, payment is made. If the importer or Citibank does not agree to waive the discrepancies, the Japanese Negotiating Bank will be notified of the discrepancies and that the unpaid documents are either being returned to it or held at its disposal. Foreign Currency Letters of Credit Letters of Credit may also be issued in foreign curren- cies, but exporters and importers should be aware of the foreign exchange risk arising from rate fluctuations between currencies. Letters of Credit illustrated in this publication are used to pay for exports from or imports to the U.S., and are issued in U.S. dollars. Most transactions with U.S. importers and exporters are denominated in U.S. dollars. The procedures under Letters of Credit issued in another currency may differ. If the U.S. importer requests a Letter of Credit in the currency of the exporter’s country, payment to the exporter is made in that country’s currency. When documents complying with the Letter of Credit terms are received by the U.S. Issuing Bank, the U.S. importer must pay the bank an amount equal to the foreign currency paid. The Issuing Bank normally requires the importer to execute a “foreign exchange contract”, which may be a separate agreement or part of the Issuing Bank’s standard reimbursement agreement with a U.S. importer applying for a letter of credit. The bank sells the importer the required foreign currency at the bank’s selling rate on that day (spot rate). The exchange cost— the amount the importer must pay in U.S. dollars—is dependent on the rate when the foreign exchange contract is executed. The importer is subject to exchange rate risk since the exchange rate can fluctuate substan- tially between the time the contract of sale is made and the date of actual payment under the Letter of Credit. Although foreign exchange rates vary constantly, U.S. importers can eliminate unfavorable exchange risk by arranging a “forward foreign exchange contract” with the bank. This establishes in advance the exchange rate to be used at the time of payment. Thus, the importer will know the exact cost in dollars at the beginning of the transaction and the Issuing Bank will cover the foreign exchange risk. 25 Illustration 8 – Confirmed Irrevocable Straight Letter of Credit – EXPORT LETTER OF CREDIT Citibank, N.A. New York, New York Confirmed Irrevocable Straight Letter of Credit May 11, 20_ Mail To: H. K. Exporter Corporation 125 Broadway Citibank Ref. 20020001 New York, NY 10022 Issuer’s Ref. 318 Ladies and Gentlemen: At the request and for the account of Banco De Sugar Loaf, Rio de Janeiro, Brazil, we are advising you that it has issued this Irrevocable Letter of Credit in your favor for the account of L. B. Importer Company, for a sum or sums not exceeding a total of U.S. $25,000.00, available by payment of your draft(s) drawn at sight on us subject to the following: Expiration Date: July 22, 20_ Latest Shipping Date: July 1, 20_ Transshipment not allowed Partial shipment not allowed Shipment from: Port of New York Shipment to: Port of Sao Paulo, Brazil and accompanied by the following documents: 1) Full set original On Board Ocean Bills of Lading issued to order, blank endorsed, notify the buyer, marked “Freight Prepaid.” 2) Full set Marine Insurance Policy or Certificates, including War Risks, losses payable to the order of the assured and endorsed in blank. 3) Commercial invoice, original and two copies, stating that it covers: “100 Television Sets, C.I.F. Sao Paulo.” This Letter of Credit must accompany all draft(s) and documents. When presenting your draft(s) and documents or when communicating with us you must mention our reference number shown above. The issuer of the Letter of Credit engages with you that each presentation made in compliance with the terms of the Letter of Credit will be duly honored on delivery of documents as specified, if presented on or before the expiration date. We confirm this Letter of Credit and hereby undertake with you to honor each presentation made in compliance with the terms of this Letter of Credit if presented on or before the stated expiration date to us at Citicorp North America, Inc., Servicer for Citibank, N.A., 3800 Citibank Center, Bldg. F, 1st Floor, Sort 3000, Tampa, Florida 33610, or such other address as we may advise from time to time. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication 500 (the “UCP”). Our confirma- tion to you is subject to the UCP and, as to matters not addressed by the UCP, is subject to and governed by New York State and applicable U.S. federal law. Sample Letter of Credit Authorized Signature 26 Illustration 9 – Irrevocable Negotiation Letter of Credit – IMPORT LETTER OF CREDIT Citibank, N.A. New York, New York Irrevocable Negotiation Letter of Credit February 2, 20_ Mail To: Citibank, N.A. Tokyo, Japan Citibank Ref. 10020000 Ladies and Gentlemen: We hereby issue our Irrevocable Letter of Credit in favor of The Japan Textile Exporters Corp., Tokyo, Japan, by order and for the account of the Asian Textile Importers, Inc., Des Moines, Iowa. for a sum or sums not exceeding a total of U.S. $116,000.00, available with any bank by negotiation of the beneficiary’s draft(s) drawn at sight on us subject to the following: Expiration Date: June 22, 20_(Japan) Latest Shipping Date: June 1, 20_ Transshipment not allowed Partial shipment not allowed Shipment from: Japan port Shipment to: Port of San Francisco, CA and accompanied by the following documents: 1) Full set original On Board Ocean Bills of Lading issued to order, blank endorsed, notify the buyer, marked “Freight Prepaid.” 2) Full set Marine Insurance Policy or Certificates, including War Risks, losses payable to the order of the assured and endorsed in blank. 3) Commercial invoice, original and two copies, stating that it covers: “25,000 Yds. Silk, C.I.F. San Francisco.” This Letter of Credit must accompany all draft(s) and documents and must be presented for negotiation within 21 days after the date of shipment shown on the Bill of Lading but no later than the expiration date. We hereby undertake with the beneficiary and any nominated bank that gives value that presentations made in compliance with the terms of this Letter of Credit will be duly hon- ored if PRESENTED FOR NEGOTIATION on or before the stated expiration date. All pre- sentations and communications to us must be sent to: Citicorp North America, Inc., Servicer for Citibank, N.A., 3800 Citibank Center, Bldg. F, 1st Floor, Sort 3000, Tampa, Florida 33610, or such other address as we may advise from time to time. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication 500 (the “UCP”) and, as to matters not addressed by the UCP, is subject to and governed by New York State and applicable U.S. federal law. Sample Letter of Credit Authorized Signature 27 If the Beneficiary of a Letter of Credit denominated in a foreign currency wishes to receive payment in U.S. dollars, it may arrange for the Paying Bank or the Negotiating Bank to exchange (sell) the foreign currency realized from the transaction. Here, the foreign exchange rate risk is assumed by the Beneficiary, since conversion to U.S. dollars is made at the rate existing at the time the foreign exchange contract (spot contract) is executed. To avoid this risk, the Beneficiary may arrange a “forward foreign exchange contract” with its bank. Generally, Beneficiaries and importers are not anxious to speculate in the foreign exchange market. They will protect their position in Letter of Credit transactions by arranging forward foreign exchange contracts through international bankers qualified to provide guidance and expertise in foreign currency dealings. Citibank foreign exchange traders maintain constant contact with foreign exchange markets throughout the world to provide expert support for such transactions. [...]... provide financial assistance in the form of grants, loans, subsidies and guarantees to facilitate the export of goods and services to emerging markets When these exports are financed by Letters of Credit, banks become intermediaries In this chapter is a list of key export credit agencies and international development banks 38 Export Credit Agencies Importers, exporters and commercial banks often participate... participate in export credit agency programs established to facilitate the export of goods and services to emerging markets The agency programs provide financial assistance in the form of grants, loans, subsidies and guarantees Grants, loans and subsidies are forms of direct agency assistance Guarantees are a form of indirect assistance used to induce a commercial bank to provide a direct loan to the importer... Letter of Credit in favor of the manufacturer or supplier of those goods needed for shipment under the first Letter of Credit In this case, the Beneficiary of the Irrevocable Letter of Credit (generally a broker or middleman) will become the Applicant of the second Letter of Credit, utilizing the first as a source of payment to the issuer of the second Letter of Credit The two Letters of Credit used to facilitate... and resale of the same goods are called Back -to- Back Letters of Credit Coordinating two Letters of Credit to cover both the purchase and resale of the same goods is a complicated process A Beneficiary seeking back -to- back financing should ask its bank if this type of accommodation is available prior to requesting a Letter of Credit in its favor In order to rely on the benefits of the first Letter of. .. Simplified Letter of Credit depends upon the creditworthiness of the Applicant The Applicant’s creditworthiness will be of increased importance to the bank to the extent that the bank will not have control over a bill of lading or other title document that controls the goods described in that document 35 LETTERS OF CREDIT Export Credit Agencies and International Development Banks C H 6 A P T E R Many government... Letter of Credit, the issuer of the second Letter of Credit will likely insist that it be the Confirming Bank under the first, so as to have a right to receive and to accept or reject amendments in its discretion Assignment of Proceeds If the Letter of Credit is not transferable, the Beneficiary in search of financing may request the Issuing or a Nominated Bank to pay to a third party some or all of the... Letter of Credit issued by the importer’s local bank In either case, whether the agency assistance is direct or indirect, the agencies typically insist upon Letters of Credit as opposed to advance cash payments—as the method for disbursing proceeds of the loan or other financial assistance The Beneficiary’s right to payment under the Letter of Credit will be subject to the terms and conditions of the... commercial banks under World Bank commitments are reimbursable to them via telex claims to the World Bank No special documents are normally required to obtain reimbursement Other Development Banks - Similar to the World Bank, there are a number of banks outside of the United States whose ownership and focus are regional, such as the Asian Development Bank, the InterAmerican Development Bank, and the African... financial assistance to the developing world A major portion of this assistance is disbursed directly to the recipients via special accounts opened by them with international commercial banks The disbursements are frequently used to establish cashcollateralized Letters of Credit The World Bank also issues commitment letters to induce commercial banks to issue or confirm Letters of Credit Payments made... accordance with sub-article 48(d) of the UCP500 There are many reasons the first Beneficiary might decide to retain this right—for example, the amendment might pertain to only one of the four second Beneficiaries Back -to- Back Letters of Credit – On occasion a Beneficiary of a nontransferable Letter of Credit seeks to use it as a basis for requesting a bank to issue a second, parallel Irrevocable Letter of . required to receive the advance could be a standby Letter of Credit assuring repayment. Standby Letters of Credit are discussed in Chapter 8. 31 Red Clause Letters of Credit If an Applicant wants to. identity of one party from another, a Transferable Letter of Credit or a Back- to- Back Letter of Credit may permit the transaction to go forward. Transferable Letters of Credit – When a Letter of Credit issued. source of payment to the issuer of the second Letter of Credit. The two Letters of Credit used to facilitate the purchase and resale of the same goods are called Back -to- Back Letters of Credit. Coordinating