Partial letter of credit (L/C) guarantees may have a role to play in state support for businesses and local governments in parts of the US' south that suffered from last year's devastating Katrina and Rita hurricanes.

The L/C guarantees may be used to support the billions of dollars in preferential loans in the new federal Gulf Opportunity Zone Act (GOZA), enacted by Congress last month and which responds specifically to the problems of hurricane recovery in the US' south.

Credit requirements

The largest loan provision in GOZA gives the state of Louisiana the authority to issue US$7.9 billion in tax-exempt bonds to help businesses rebuild their facilities, without the state facing the liability for the debt repayment.

This way of borrowing is cheaper than conventional loans but the credit requirements are tough, causing state officials like Louisiana's state Treasurer, John Kennedy, concern that small businesses may find it difficult to access the money, leaving only larger companies to benefit.

State-backed bond

State officials are mulling over a proposal for the state to put up money to back a percentage of the bond debt so banks might be more willing to give L/Cs to businesses seeking the tax-exempt bonds.

The idea is that the state could provide some sort of guarantee covering some portion of any defaults. Legislators would have to authorise the issuance of bonds and would have to agree to back any of the bond debt.

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