Why SBLC Draft Requests Are Often Meaningless

At Financely, we arrange standby letter of credit transactions for companies that require bank-issued credit support. In some cases the party approaching us is the intended beneficiary. In others, its client needs an SBLC issued in favor of a third-party commercial counterparty. Depending on the structure, a collateral or credit-support provider may ultimately become the applicant for the instrument.

None of this is unusual. Third-party applicant and collateral-supported structures are part of the market we work in.

What is unusual is the number of intermediaries who contact an arranger and immediately demand an SBLC draft before there is an engagement, a settled structure or enough information to determine what is actually being arranged.

We may still be trying to establish the beneficiary, underlying obligation, required amount, tenor, issuing-bank parameters and collateral route.

The broker, meanwhile, has reached the critical stage of the transaction: he needs a Word document.

Preferably titled “FINAL APPROVED MT760 DRAFT,” despite neither the finality nor the approval having occurred.

The Draft Is Not the Transaction

A standby letter of credit is a banking undertaking. The document matters because a bank stands behind it.

A generic draft, standing alone, establishes none of the things that make issuance possible.

It does not establish:

• the identity of the eventual applicant;
• the bank that may issue the instrument;
• the applicant's credit capacity;
• the collateral supporting issuance;
• the beneficiary's actual requirements;
• the issuing bank's willingness to accept those requirements;
• the tenor or pricing available for the proposed structure;
• compliance clearance;
• or an approved banking exposure.

It is proposed wording.

That wording may become relevant later. Before the transaction has substance, however, it says remarkably little about whether an SBLC can actually be delivered.

Why Brokers Ask for the Draft First

There is a practical reason generic drafts are so popular in intermediary chains: documents are easier to obtain than credit.

They need something to circulate

The broker may have approached us on behalf of a beneficiary that genuinely needs an SBLC. That is fine.

The problem begins when the intermediary treats our proposed instrument wording as material to be collected before retaining us.

Once received, the draft can be circulated to another broker, a supposed banker, a “provider,” a consultant or the next person in the chain with the question:

• “Can your bank accept this?”
• “Can you issue this?”
• “Can your provider approve the wording?”

Soon there are twelve people reviewing a transaction that none of them is arranging.

Everyone has the draft. Nobody has the credit.

Drafts create visible activity

A draft can be edited, marked up, forwarded and “approved.” This creates an impressive quantity of correspondence.

Credit work is less theatrical. It requires somebody to establish the amount, tenor, applicant route, collateral, bank parameters, economics, documentation and compliance position.

So the broker-joker universe often gravitates toward the part that can be performed from a laptop without a balance sheet.

They confuse specimen wording with issuance capability

We regularly encounter people who speak about an “MT760 draft” as though the correct combination of clauses unlocks access to a major bank.

It does not.

If the applicant structure does not work, the collateral is inadequate, the economics are unrealistic or the requested obligation is unacceptable to the issuing institution, immaculate wording will not rescue the transaction.

What Financely Is Actually Arranging

The party contacting Financely is not necessarily the entity that will become the SBLC applicant.

A typical mandate may involve several distinct roles:

This is precisely why a generic draft requested at the start of the conversation is often useless.

The correct wording depends on the structure that is ultimately implemented.

If a collateral provider will act as applicant, that matters. If the client is arranging an SBLC in favor of a third-party beneficiary, that matters. If the beneficiary has mandatory wording requirements, those matter too.

We establish those facts through the transaction process. We do not guess them in advance and circulate a template in the hope that the transaction later resembles it.

What We Establish Before Wording Matters

When a prospective client or intermediary presents an SBLC requirement, the useful questions are commercial and structural.

We need to establish:

• who requires the arrangement;
• who the ultimate beneficiary will be;
• what underlying obligation the SBLC must secure;
• the required face amount;
• the required tenor;
• the required issuing-bank profile;
• whether the beneficiary has prescribed instrument requirements;
• whether an applicant and banking facility already exist;
• whether Financely needs to arrange third-party collateral or credit support;
• whether a collateral provider may need to act as applicant;
• the assets, liquidity or indemnity available within the proposed structure;
• the commercial economics;
• and whether the transaction is viable enough to proceed.

Once these points are established, the appropriate execution path becomes much clearer.

Before then, arguing over whether clause four should say “upon first written demand” or some other formulation is premature.

The transaction does not become USD 25 million more bankable because a broker changed “shall” to “will.”

Who Handles the Banking Formalities

Once an SBLC transaction reaches execution, wording becomes a legitimate part of the process.

The beneficiary may require a particular form of undertaking. Its lawyers, treasury department or bank may review the proposed terms. The applicant side may comment on those requirements. Financely coordinates the arrangement and the commercial parties involved.

The issuing institution ultimately determines the undertaking it is prepared to issue.

Depending on the transaction, the final instrument may require consideration of:

• drawing conditions;
• presentation requirements;
• expiry mechanics;
• applicable ICC rules where relevant;
• transferability or assignment provisions;
• governing-law issues;
• sanctions and compliance restrictions;
• the bank's standard clauses;
• operational requirements;
• and the terms under which the bank approved the exposure.

The final wording therefore belongs inside a real bank execution process.

It is not a collectible that must be handed to every intermediary before they decide whether they want to engage the arranger.

“Our Bank Needs the Draft”

This is one of the more common responses we receive.

A broker asks Financely for a draft before engagement. We explain that the transaction first needs to be assessed and structured. We are then informed that “the bank” cannot proceed without our draft.

Sometimes this is perfectly legitimate. An identified beneficiary bank or corporate treasury function may want to review indicative wording as part of a specific transaction.

In that case, there should be context.

Which institution is reviewing it? What is the underlying transaction? Who is the beneficiary? What instrument characteristics have been requested? Has the commercial party actually appointed Financely to arrange the transaction?

Those are ordinary questions.

The broker-joker variation is different:

At that point, the discussion is no longer about approving an actual instrument.

It is document fishing.

The Broker-Joker Protocol

We also receive elaborate “procedures” explaining how we are supposedly required to arrange the transaction.

They often read something like this:

1. Provider sends draft MT760.
2. Beneficiary approves wording.
3. Provider issues invoice.
4. Provider bank sends MT799.
5. Beneficiary bank sends RWA.
6. Provider sends MT760.
7. Instrument is monetized.
8. Consultants receive commissions.

No mention is made of the bank underwriting the applicant, the collateral supporting the obligation, the legal relationship between the relevant parties or why any regulated institution would agree to the proposed exposure.

The commissions, however, are documented with military precision.

The credit may be imaginary, but the IMFPA is always fully executed.

Our process is simpler

Financely's process begins with the transaction itself.

The Problem With Draft Collectors

There is another category we encounter: companies and intermediaries that appear more interested in acquiring transaction documents than executing transactions.

They request:

• SBLC drafts;
• BG drafts;
• MT799 wording;
• RWA templates;
• BCL templates;
• proof of funds wording;
• procedures;
• bank coordinates;
• DOAs;
• NCNDAs;
• IMFPAs;
• and any other PDF that can later be presented as evidence of having a banking relationship.

The request is usually described as necessary for “due diligence.”

Curiously, the due diligence seldom extends to retaining the arranger, establishing the transaction or demonstrating that the commercial party can meet its obligations.

Financely does not operate as a free document library for intermediary networks.

When an SBLC Draft Actually Matters

There is nothing inherently wrong with reviewing draft wording.

There are transactions where early wording review is sensible, particularly where the beneficiary has strict requirements or where the issuing institution needs confirmation that a proposed undertaking is acceptable before proceeding further.

The distinction is context.

A useful draft relates to a defined transaction involving identifiable parties and an active execution path.

For example:

• the beneficiary has provided its required form of SBLC;
• the applicant structure has been established;
• the proposed issuing route is known;
• the required amount and tenor have been agreed;
• the transaction has passed sufficient preliminary review to justify execution work;
• and the parties have a reason to reconcile the beneficiary's requested wording with what the issuing institution can accept.

At that stage, wording matters a great deal.

Before that stage, a generic draft is usually a specimen, and we treat it accordingly.

The SBLC Is the Result of the Structure

An SBLC should be understood as the output of a credit arrangement.

The real work may involve arranging collateral, identifying an appropriate applicant structure, determining acceptable issuing institutions, reviewing the commercial obligation, coordinating counterparties and resolving bankability issues.

In some Financely mandates, a third-party collateral provider may supply the credit support and act as the applicant. In others, the client already has an applicant and requires assistance with the issuance route. In still others, the party approaching us represents the beneficiary and needs an SBLC issued to satisfy a separate commercial transaction.

Those structures are different.

They cannot sensibly be reduced to:

That request attempts to start with the final banking instrument before establishing the arrangement that allows the instrument to exist.

Why Financely Does Not Participate in Draft Theatre

Our mandate is to structure and arrange executable transactions.

That means applying resources to transaction assessment, collateral analysis, credit structuring, counterparty coordination, documentation, bank distribution and execution.

We do not distribute proprietary transaction materials merely so an unengaged intermediary can circulate them through a broker chain.

If a company has a genuine SBLC requirement, we can assess it.

If the requirement is viable and the company retains Financely, we work through the appropriate structure and execution path.

When draft wording becomes relevant, we deal with it in the context of the actual transaction and the institutions involved.

That is our process.

A prospect arriving with a five-page “international banking protocol” copied from another broker does not change it.

FAQ

The Bottom Line

We are frequently approached by intermediaries representing companies that genuinely need standby letters of credit.

That is our business.

The problem begins when the intermediary believes that arranging the transaction starts with collecting a generic draft from Financely.

It does not.

We first need to know what is being arranged, for whom, in whose favor, for what amount, for what tenor and against what credit or collateral support.

If a third-party applicant or collateral provider needs to be introduced, that becomes part of the structure. If the beneficiary has mandatory wording, that becomes part of execution. If an issuing bank needs to approve specific clauses, that is addressed with the relevant bank.

That is how the transaction develops.

The broker-joker version reverses the process: demand the final-looking paperwork first and attempt to discover the transaction later.

And no, adding “URGENT BANK TO BANK” to the email subject does not improve the credit.