1. Assignments v. Transfers
    The letter of credit industry and the law that governs letters of credit distinguish the transfer of a letter of credit from the assignment of the credit’s proceeds. This chapter discusses assignment. Chapter XV discusses transfer.
  2. The Credit as an Asset of the Seller
    Once the letter of credit has been issued, the seller/beneficiary has a contingent asset against which it can borrow. Lenders know that, if the seller/beneficiary complies with the terms and conditions of the documentary credit, the issuer, a bank, must pay the seller. Lenders thus value the documentary credit as an asset that can secure loans to the seller, and, if the seller needs credit to pay its suppliers, some lenders will make an advance to the seller and take a personal property security interest in the documentary credit.
  3. The Seven Steps of the Assignment Transaction
    1. Step One: Issuance
      First, the credit must be issued in order for the seller to have an interest to assign.
    2. Step Two: Finding a Lender Once the credit has been issued, the seller will seek the lender’s agreement to make the loan the seller needs to pay its supplier.
    3. Step Three: Assignment The seller assigns the proceeds of the letter of credit to the lender.
    4. Step Four: Notice to the Nominated Bank The seller notifies the nominated bank of the assignment.
    5. Step Five: Consent The nominated bank acknowledges and/or consents to the assignment. (Local law dictates whether consent is necessary.)
    6. Step Six: Presentment When it has prepared the necessary documents, the seller presents its documents to the nominated bank.
    7. Step Seven: Honour and Payment to the Lender If the seller’s presentment complies with the terms and conditions of the credit, the nominated bank may honour or negotiate the draft and/or documents and pay all the credit’s proceeds, or as much as has been assigned, to the lender. If the nominated bank chooses not to honour or negotiate, proceeds will be disbursed when they have been collected.
  4. Guarding against Risks in Assignments
    There are risks in the assignment transaction. Once the lending bank makes an advance, it is vulnerable to amendments that diminish the credit’s value or impose conditions that it cannot satisfy. It always faces the risk that the seller/beneficiary is unable (in the event of insolvency) or unwilling to draw on the credit. Sometimes the lender takes a power of attorney from the seller authorizing the lender to draw the seller/beneficiary’s drafts and prepare its invoices.


  1. The Back-to-Back Credit

Sometimes, of course, the nominated bank will act as the lender in an assignment transaction, and, sometimes, rather than make an advance to the seller, the lender will issue a credit to the supplier. Under this back-to-back credit transaction, the lender does not advance the proceeds of the credit to the seller but undertakes to pay the supplier directly if the supplier presents the key documents necessary to satisfy the conditions of the original credit. This is done by issuing a second letter of credit, called the “back-to-back” credit. By requiring all of the documents that are necessary to satisfy the documentary conditions of the original credit (sometimes called the “master” or “original” credit), the nominated bank is able to assure itself, before it makes any payments under the back-to-back credit, that it will have the documents necessary to comply with the prime credit’s documentary conditions. The closest the nominated bank can get is to require the supplier to present all the documents other than the seller’s invoice. The supplier will present its own invoice in order to satisfy the back-to-back credit. Once the back-to-back credit has been honoured by the nominated bank (which is the issuer of the back-to-back credit), the documents become the property of the seller. By substituting its own invoice for that of the supplier, the seller can complete the documents required to satisfy the original credit.

Sometimes the documents under the two credits do not match, and the seller may need to substitute other documents or supplement the documents presented by the supplier (e.g. the shipping terms are “ex works” in the seller’s contract with the supplier but “carriage and insurance paid” in the seller’s contract with the buyer, which means that the seller is arranging transportation and insurance). The more differences the nominated bank allows in these two credit transactions, the more the bank must rely on the seller to perform actions that generate the additional documents necessary to satisfy the prime credit and the less they fit the back-to-back model transaction. The nominated bank must pay the second credit regardless of the seller’s ability to perform these actions, and the nominated bank may insist on additional collateral from the beneficiary of the master credit in order to secure the bank’s reimbursement claim.

  1. Guarding against Risk in the Back-to-Back Transaction
    The assignment risks mentioned in section 4 above also arise in the back-to-back transaction. Once the nominated bank or another lender issues the back-to-back credit, it is vulnerable to amendments to the prime credit that cause its requirements to differ from those of the back-to-back credit. Some back-to-back credit issuers insist that the issuer of the prime credit ask the back-to-back issuer to confirm the prime credit. Confirmers must assent to amendments of the prime credit and can therefore protect themselves from amendments that impact the value of the assignment of that credit (see UCP 600 art. 10). Section 4 of chapter VII discusses amendments.
    Assignment transactions are moderately complex, and parties would be well advised to seek counsel from experienced letter of credit bankers or lawyers the first time they engage in such transactions.


  1. Prepaying the Beneficiary

Sometimes the credit will authorize the nominated bank to prepay the beneficiary in order for the beneficiary to have sufficient funds to assemble the goods or commodities that are to be shipped to the buyer. These authorizations are unusual. They permit the nominated bank to advance some of the letter of credit proceeds to the beneficiary before the beneficiary ships and before it presents the invoice, transport document, insurance and other certificates required for payment. In the past, when banks issued letters of credit in paper format, these unusual clauses appeared in red or green ink to call attention to them. Bankers sometimes still call them “red clause” or “green clause” credits.

  1. The Green Clause
    Under the green clause, the nominated bank may make the prepayment(s) only against documents of title, usually warehouse receipts, covering the goods or commodities being gathered for shipment. An exporter/beneficiary of the credit who is assembling wool for export must warehouse the wool, obtain warehouse receipts from the warehouse and pledge the receipts to the nominated bank. That bank makes the prepayment so that the export/beneficiary can pay the wool producers. When the exporter has assembled sufficient wool to satisfy the sales contract with the buyer, the nominated bank, which holds the receipts as security for its advance, will release the receipts to the exporter, who takes delivery of the wool and arranges shipment and obtains the necessary transport document to satisfy the credit’s documentary condition.

  1. The Red Clause
    The red clause credit is similar to the green clause credit, without the need to provide documents of title as security for the advances.

  1. Charging the Beneficiary for the Advances
    In these prepayment transactions, the nominated bank takes whatever it needs to cover the prepayments and any interest it charges the exporter/beneficiary when it obtains the credit’s proceeds. If the beneficiary fails to ship, the nominated bank is entitled to repayment of its advance and interest from the issuer. In the case of the green clause credit, the nominated bank delivers the warehouse receipts to the issuer. In the case of the red clause credit, the issuer receives nothing for its payment, though it will obtain reimbursement from the applicant.