Expertise breaking borders. Letter of credit: an extremely powerful and niche product

The requirement

One of Spark’s FX Partners referred a lead through Spark Connect. The client required a$4,500,000 Letter of Credit to support an overseas transaction of used cooking oil from a supplier in the APAC region to the Netherlands, where the end customer was based.

The supplier required the document to gain access to production finance via their bank, which would be required to initiate the process. This security was a mandatory step for the transaction to proceed.

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Main challenges

The supplier’s bank, in the APAC region, was funding the initial part of the process, meaning they would collaterise most of the risks. As they wanted to mitigate all potential additional risks, they did not accept a financial institution to be the issuer of the Letter of Credit. They would only proceed if a traditional bank agreed to issue the document.

Notwithstanding, this was not the only adversity faced by Spark. The provider did not have a RMA* with the supplier’s bank. An alternative acceptable route to relay the Letter of Credit would be imperative.

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Outcome

To facilitate the Letter of Credit, the intended provider leveraged their network to find a traditional banking institution that met the criteria required by the supplier's bank. This partnership provided the solution, with the traditional financial institution issuing the Letter of Credit on behalf of the intended provider.

They were a traditional bank, solving the first challenge, and they could relay the Letter of Credit through a correspondent bank who had the required RMA in accordance to the APAC’s bank.

Spark successfully helped source a $4,500,000 Letter of Credit, unlocking the whole transaction.

What is a letter of credit

A Letter of Credit is a document issued by a financial institution to guarantee payment on a transaction- usually used for overseas requirements - as the institution commits to cover the full amount in the event of any issues, like defaults.

There are many types of Letter of Credit, the best fit for each case is suggested by the provider based on the demands of all parties involved, specially the payment terms required.

For this case, Spark secured an Irrevocable Documentary Letter of Credit. Irrevocable as its content cannot be altered without the consent of all parties involved. Documentary as the payment relies on proof of shipment and compliance. Essentially, the provider will only honour the Letter of Credit if all requirements for this transaction are met.

*RMA - Relationship Management Application is a SWIFT protocol to securely manage and authorise messages between financial institutions to reduce fraud risks.