Public Commentary: The process and cost ranges below reflect FG Capital Advisors’ experience arranging collateral-backed letters of credit (LCs). Figures are indicative only and do not constitute investment advice or a solicitation.
Securing a Letter of Credit Without Internal Collateral — Capital-Raising, Structuring, and Cost Breakdown
A bank will not issue a letter of credit unless it is satisfied that the applicant—or a third party—can reimburse the bank if the LC is drawn. The standard requirement is 100 % cash or investment-grade standby support. When that collateral is unavailable in-house, corporates can raise external capital and pledge it to the issuing bank, or tap one of the few specialty finance lenders willing to post collateral for a fee. The transaction must satisfy bank credit committees, investors, and—increasingly—regulators overseeing anti-money-laundering and capital-adequacy rules.
End-to-End Transaction Workflow
- Mandate an Investment Bank / Placement Agent
• Draft an information memorandum detailing LC purpose, trade flow, and repayment plan.
• Build a financial model showing collateral coverage and exit strategy.
• Approach private-credit funds, insurers, or strategic equity investors. - Capital Raise & SPV Formation
• Investors subscribe to secured notes or preferred equity issued by a bankruptcy-remote SPV.
• Proceeds are deposited with an independent security trustee —usually a top-tier bank. - Collateral Pledge to Issuing Bank
• Trustee places cash (or an investment-grade standby LC) in a pledged account.
• Issuing bank releases the operative LC to the beneficiary. - Counter-Guarantee Layer (Optional but Common)
• A multilateral agency (e.g., Afreximbank, MIGA) or AA-rated insurer provides a reimbursement guarantee to the issuing bank.
• This reduces the bank’s capital charge and may trim the LC fee by 30–50 bps. - Lifecycle Management & Take-Out
• LC expires unused or is retired from operating cash flow.
• Pledged collateral is released; investors are repaid principal plus coupon or preferred dividend.
Cost Components (Indicative Ranges)
| Component | Typical Range |
|---|---|
| Placement-Agent Fee | 2.0 – 4.0 % of capital raised (success-based) |
| Legal Counsel (Borrower & Lender) | US$60k – 150k depending on jurisdictions |
| Trustee / Security-Agent Fee | 0.15 – 0.30 % p.a. on collateral |
| Issuing Bank LC Fee | 1.0 – 2.5 % p.a. of LC face value (pro-rated for tenor) |
| Liquidity-Provider Yield | SOFR + 450 – 700 bps (debt) or 10 – 15 % IRR (preferred equity) |
| Counter-Guarantee Premium | 0.5 – 1.5 % p.a. of LC amount |
Governance & Risk-Control Architecture
- Independent Security Trustee: Holds collateral in segregated accounts; any release requires dual authorisation.
- Cash-Flow Waterfall: LC drawdowns and reimbursements pass through blocked accounts, ensuring transparency for lenders and investors.
- Robust Legal Opinions: Local counsel confirms enforceability of pledges, counter-guarantees, and SPV bankruptcy remoteness.
- Periodic Reporting: Quarterly trustee statements and annual audits satisfy investor and bank oversight.
- URDG 758 Invocation Protocol: Pre-agreed steps dictate collateral release if the LC is called, minimising dispute risk.
Why Only a Handful of Specialty Lenders Provide LC Collateral
- Opportunity Cost: Posting cash collateral ties up liquidity that could earn higher yields in direct-lending strategies.
- One-Way Risk Exposure: If the LC is invoked, funds are frozen until recovery, while upside is capped at the coupon or fee.
- Operational Complexity: Coordinating multiple counterparties, legal opinions, and cross-border regulations elevates transaction overhead.
- Capital-Adequacy Impact: Basel rules assign high risk-weighted assets (RWA) to contingent liabilities unless fully cash-collateralised.
- Reputational Considerations: Providers select only well-documented, KYC-clean transactions to avoid policy-breach headlines.
Engagement
Corporates needing LC support without readily available collateral are invited to consult FG Capital Advisors. We coordinate investment-grade liquidity providers, trustees, legal counsel, and issuing banks to deliver fully secured LC facilities within 30–45 days.
This document is for informational purposes only. It does not constitute investment advice and should not be interpreted as an offer to buy or sell any security, financial instrument, or service. Independent professional guidance is recommended before acting on any information herein.
