Important Disclaimer: This article is for informational purposes only. LC monetization transactions are subject to regulatory, counterparty and underwriting conditions. FG Capital Advisors only works with investment-grade LC issuers.
Letter of Credit Monetization: How LC Discounting and Assignment Actually Work
LC monetization refers to converting a valid, issued Letter of Credit into immediate liquidity by selling or pledging it to a funder. The LC, issued typically under UCP 600 or URDG 758 rules, must be clean, irrevocable and issued by a recognized bank. Funders discount the LC at an agreed rate and provide cash upfront. Upon LC maturity, repayment comes from the issuing bank.
Step 1 — LC Issuance and Acceptance
A commercial LC is issued by a globally rated bank. Key requirements include:
- Governing rules (UCP 600, ISP98 or URDG 758)
- Clean and unconditional terms (payable at sight or deferred, no restrictive clauses)
- Issuer bank rating (investment-grade or acceptable Tier 2)
Once issued, the LC becomes eligible for discounting.
Step 2 — Assignment and Revenue Pledge
The funder requires legal security. This is achieved by:
- Contract Assignment: Assigning receivables from the underlying trade contract to the funder.
- Revenue Pledge: Pledging project or trade revenues to ensure repayment in case of LC payment issues.
Both create enforceable claims beyond the LC itself.
Step 3 — Underwriting and Discounting
Funder conducts due diligence:
- Issuer's creditworthiness and settlement history
- LC terms and delivery milestones
- Beneficiary's financial standing and counterparty risk
Approved LCs are discounted. For example, a $10M LC with 90-day maturity may be funded at ~$9.85M (discount based on tenor and issuer risk premium).
Step 4 — LC Settlement and Funder Repayment
On LC maturity, issuing bank pays full face value. Funder recovers capital plus discount margin. Any excess (if structured) can revert to the beneficiary as surplus liquidity.
Eligible vs. Non-Eligible LC Structures
| Criteria | Eligible | Not Eligible |
|---|---|---|
| Issuing Bank | Tier 1 or strong Tier 2 | NBFC or unrated bank |
| LC Type | Irrevocable, clean terms | Conditional, standby, performance LC |
| Legal Security | Assignment + revenue pledge available | Unsecured or vague claim rights |
| Underwriting | Full credit analysis + approval | Insufficient details or unacceptable issuer |
Final Word
Letter of Credit monetization is a structured finance tool, not an automatic right. Only clean, irrevocable LCs issued under UCP 600 or URDG 758 by credible banks are accepted for discounting. Assignments and pledges are essential for lender security. Non-standard LCs, NBFC-issued instruments, and performance bonds are generally not fundable in the real market.
FG Capital Advisors only works with globally recognized LC issuers and conducts strict underwriting before approving monetization transactions. Speculative LCs or informal instruments will not be considered for discounting.
