The terms of letters of credit (L/Cs) arranged to underpin variable rate bonds in the US are becoming tighter.

One example of this is an L/C from Wachovia covering up to US$100 million in variable rate bonds for a Florida ballpark.

Shorter life

The life of the bonds is 40 years and, at the close of the current L/C's two-year term, Wachovia and Miami-Dade County have an option to renew.

Analysts say this is normal in today's bond market, but just eighteen months ago, L/C terms would have extended to three, five or seven years.

Risk mitigation

Banks are resorting to shorter L/C terms to mitigate credit risks and to allow them an easier and quicker exit if required, they say.

Extensions to L/C terms are also becoming harder to come by, according to industry sources.

Wachovia's exposure

Exposed to risky loans, Wachovia suffered heavy losses in its loan portfolios during the subprime mortgage crisis.

Once the fourth largest US bank, Wachovia ceased to be an independent corporation on 31 December 2008 when Wells Fargo acquired it.

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