The shortage of letters of credit (L/Cs) has prompted some larger companies with healthy credit ratings to turn away from L/Cs to surety bonds.

Until recently, L/Cs from banks provided a reasonably priced source of collateral, but now bonds from insurers appear more competitively priced.

Shift to L/Cs

In the 1990s, companies shifted from bonds to lower-cost L/Cs for a variety of non-trade reasons.

Companies that self-insured workers compensation obligations, for example, often relied on L/Cs as collateral for those programmes.

But as L/Cs have become harder to come by and substantially more expensive, companies have been shifting back to bonds.

Price trends

Industry sources expect the trend towards bonds to continue, particular if bank credit facilities renew at a lower level of L/C capacity for some clients.

Although the bonds are cheaper than L/Cs at current prices, surety bonds are said to be three times the price companies used to pay for L/Cs.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.