Revolving letter of credit clause

[AsifMahmoodButt]

Daniel,
Perhaps what Jason is trying to clarify here is the difference between booking your overall exposure & booking your contingent liability.

Under a cumulative revolving credit there is no difference between booking your exposure & your contingent, i.e. it should be booked for the full cumulative value. However, under a non- credit cumulative although your fund based exposure may swell up to the full cumulative value owing to applicant’s default or bankruptcy but your contingent liability at any point of time would not go beyond the face value of the credit.
Regards, Khalid

[AsifMahmoodButt]

Hi Daniel,
I understand your argument but please note even though the Applicant goes Bankrupt before the first shipment, my undertaking as an IB continues and exposure gradually increases to 1.2 m over 12 months , in the 6th month if I have to pay, it would have automatically increased to 600k, it would not be 1.2M.
Regards

[DanielD]

Khalid, Jason,
It seems that we are stubborn guys sticking to their guns. Maybe
further opinions will come up.
Best regards
Daniel

[AsifMahmoodButt]

Hi Daniel,
Don't take it to heart. Let me put it another way. There is an LC opened on 1st Jan for 100K allowing partial shipments. At the end of the month just before shipment you get an amendment increasing by 100k along with increased goods and extended shipment/expiry dates. The first shipment takes place and you receive docs on 1st Feb and the LC value is now reduced to 100k.
The trend continues for 12 months and at the end of each month you keep receiving amendments for increases of 100k with shipments regularly taking place for docs to reach on the first of each month.The timing of the amendment and shipment taking place is perfect.
May I ask how you would record this? Isn't this the same pattern as a non cumulative revolving LC with shipments of 100k taking place every month?
Regards
Jason

[DanielD]

Jason,
First, let me assure you that I do not take it to heart. Actually, it is a good exchange of different points of view.
I will specify what I mean by non-cumulative to find out if it is the same for you. For me, a DC revolving and non-cumulative means that part of a shipment which has no been forwarded during a required period cannot be shipped during the next period allowed for the next shipment.
The fact that a DC is revolving cumulative or not does not change the amount of the undertaking of the IB. At the time of issuance, the IB must book its obligation for the amount of all periods. For instance if the DC is issued for a shipment of goods for CHF 100 revolving for 10 more shipments (cumulative or not), I will have to book CHF 1'100.-- at the time of issuance.
If I issue a DC for CHF 100.-- and afterwards, I am required to increase it for another CHF, it is different since I am not obligated to amend. I will agree or not. Daniel

[AsifMahmoodButt]

Hi Daniel,
Sorry I was away and I agree that discussions like these do help all of us. From your example, at no point of time will you ever be called upon to pay the full amount IE CHF 1100/- since it is non-cumulative, so why book the full amount? If the applicant goes bankrupt as mentioned earlier, that is another story since you would have to anyway make provisions for the Bad and Doubtful and I would follow your approach given the slightest hint of a default but for normal reliable applicants and depending on the value of the LC it is a waste to block hugh Limits for long periods.
Regards
Jason

[NigelHolt]

If I understand what is being suggested by you, Jason, and I apologise if I have misunderstood, I would find it extraordinary if, at the time of issue of a credit, a banker did not record the full amount it could possibly be called on to pay over the life of a credit as being the liability outstanding. (Of course the liability can be written down as the credit ‘revolves’, in the case of a non-cumulative credit, or drawings are made.) To me the standing of the applicant, or the impact this approach might have on the utilisation of authorised limits, are of absolutely no relevance whatsoever. I would imagine the banking authorities in any country would take the same view.



[edited 2/6/2008 9:28:20 AM]

[AsifMahmoodButt]

Hi Jeremy,
I think you may have understood what is being suggested. You mention about not recording the full amount it could possibly called upon to pay. I am doing that because the amount I would be paying at any time is the amount of the current recording which is the amount of drawing claimed. Whatever paid earlier keeps adding to the record.
At no point of time I am not recording what is being paid.I will keep on increasing the recording as and when an instalment is made and will stop recording the moment I stop paying in case of a default by the beneficary.
This is only a view since in this type of LC I know what amount I will be paying at a fixed time, which is unlike other LCs where the amounts can range from 1 to the entire amount of LC at any time.
Regards
Jason

[JudithAutié]

Hi
Coming in late on this discussion since I was away.
My auditors would really be down on my back if I didn't book the total amount of the credit (including all revolvings).

The only way I could avoid booking the whole amount is to make each revolving dependant on specific instructions by the issuing bank, i.e. include a clause saying "each revolving will come into force only on issuing bank's specific instructions/authorisation"

Although I have seen such instructions, they are rather unusual and as a beneficiary I would consider such a credit as being more of a "letter of intention" than an irrevocable DC.
Regards
Judith

[DanielD]

Jason,

Stupid of me, I should have checked before. The official answer is in "Collected Opinions 1995-2001"p. 458, second paragraph.
Daniel