A leading credit ratings agency has responded to the events of 11 September by issuing new guidance notes that underline the importance of provisions that apply to force majeure events in transactions fully supported by letters of credit (L/Cs).

The special report on force majeure events by Moody's Investor Services, highlights a scenario involving the L/C beneficiary and the bank. The bank is forced by overwhelming events to close on the last day permitted for presentation of draw documents under the terms of the L/C. The closure due to force majeure results in the L/C bank being unable to fulfil its contractual obligations to honour a conforming draw.

ISP and UCP

The Moody's report makes the point that both the International Standby Practices (ISP) and the Uniform Customs Practice (UCP) contain provisions that apply to situations involving a force majeure event. These are incorporated by reference in a L/C that chooses to be governed by them.

Moody's says its objective is to provide investors with important information with respect to the structure of L/Cs in light of the possible occurrence of force majeure events. Therefore, from 1 April the ratings agency will include, as part of its published report on new transactions fully supported by L/Cs, information concerning whether the L/C supporting the transaction stipulates that it has been issued subject to either ISP98 or UCP500.

Honourable behaviour

According to Moody's, this additional information supports financial decision making regarding transactions supported by L/Cs. The report does not address the issue of whether banks should extend credit termination dates under force majeure although author Robert Patterson suggests financial institutions should behave honourably in such circumstances.

"Moody's believes that, in the interest of maintaining their reputation and position as players in the financial market, many of the banks and other entities acting in the role of credit enhancer will, nonetheless, continue to honour their commitment to L/C beneficiary and ultimately to issuers and investors," says Patterson.

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