Bank Guarantee (BG) / Standby Letter of Credit (SBLC)

A Bank Guarantee or Standby Letter of Credit is a financial instrument issued by a bank, undertaking to pay the beneficiary the specified amount upon demand in accordance with the terms of the instrument.

These instruments are commonly utilised as collateral security or margin support for financing arrangements, trade transactions, and credit enhancement structures.

SBLCs and Bank Guarantees are widely recognised and accepted in international financial markets, making them effective tools for:

• Establishing or enhancing Lines of Credit
• Facilitating project funding
• Supporting trade finance transactions
• Strengthening balance sheet positioning

In structured arrangements, the applicant may also benefit from interest earned on capital deposited with the issuing bank for the purpose of arranging the SBLC or BG, depending on the agreed banking terms.

It is often asked: If equivalent funds must be deposited with a bank to obtain a Bank Guarantee (BG) or Standby Letter of Credit (SBLC), why not deploy those funds directly into the project instead?

The answer lies in leverage, risk allocation, and credit enhancement.

Fund-Based vs Non-Fund-Based SBLC/BG

1. Fund-Based Instrument

In a fund-based structure, the applicant deposits equivalent funds with the issuing bank as cash collateral.

• The bank issues the SBLC/BG against the blocked deposit.

• The deposited capital may earn agreed interest, subject to banking terms.

• The instrument can then be used to secure larger project financing, trade lines, or structured funding.

In this case, the capital is not “spent” — it is strategically deployed to enhance borrowing capacity.

2. Non-Fund-Based Instrument

In a non-fund-based structure, the applicant may pledge:

• Shares

• Bonds

• Securities

• Real estate

• Other acceptable assets

The bank evaluates the pledged assets and issues the BG/SBLC against the security provided.

This preserves liquidity while still creating bank-backed credit support.

Strategic Advantage

The purpose of a clean, clear, bank-issued SBLC/BG is to:

• Strengthen the financial profile of the project
• Provide collateral security for lenders
• Unlock larger lines of credit
• Reduce lender risk perception
• Improve funding terms

Rather than deploying capital directly and absorbing full project risk, a properly structured BG/SBLC allows capital to function as credit enhancement, potentially supporting a larger financing facility.

Margin & Promoter Participation

For financing assistance, lenders typically require:

• A minimum margin contribution in the form of collateral security (BG/SBLC)
• Demonstrated equity participation from the promoter

This aligns interests and demonstrates financial commitment to the project.

In structured trade finance and project funding environments, you may encounter the terms “fresh cut” and “slightly seasoned” when referring to a Standby Letter of Credit (SBLC).

It is important to understand that these are market terms, not official banking classifications.

Banks do not formally label instruments as “fresh” or “seasoned.” These descriptions are used in secondary discussions relating to credit enhancement, structuring, or monetisation.

Fresh Cut SBLC

A fresh cut SBLC refers to a newly issued instrument that:

• Has just been released by the issuing bank
• Has not been previously pledged, transferred, or monetised
• Carries full original validity (commonly 12 months + 1 day)
• Has no prior encumbrances or transactional history

In practical terms, a fresh cut instrument is considered “clean and unused.”

From a structuring perspective, fresh cut instruments are often preferred because:

• They carry maximum remaining validity
• There is no prior claim exposure
• The SWIFT history is straightforward
• Legal clarity is typically stronger

Slightly Seasoned SBLC

A slightly seasoned SBLC refers to an instrument that:

• Was issued previously and has been active for a period of time
• May be partway through its validity term
• Has not been drawn upon
• Remains valid and in good standing

Seasoning simply reflects the passage of time since issuance. It does not automatically indicate weakness or strength.

In some market discussions, a seasoned instrument is perceived as “tested,” meaning it has existed without claim or dispute. However, this perception does not replace proper due diligence.

What Matters More Than “Fresh” or “Seasoned”

The critical factors when evaluating any SBLC are:

• The credit rating and standing of the issuing bank
• Proper SWIFT MT760 issuance
• Clear governing rules (e.g. ISP98)
• Absence of liens, prior assignments, or encumbrances
• Clean title to the beneficiary
• Bank-to-bank verification capability

Whether an instrument is newly issued or partially through its term is secondary to its authenticity, enforceability, and structural integrity.

Professional Considerations

In institutional environments, the focus is always on:

• Compliance
• Clean documentation
• Direct bank communication
• Transparent transaction structure

Market terminology should never replace proper financial and legal verification.

When reviewing a Standby Letter of Credit (SBLC) or Bank Guarantee (BG), you may encounter the terms “transferable” and “assignable.”

Although these words are sometimes used interchangeably in informal discussions, they have very different legal meanings under international banking rules.

Understanding the distinction is essential when structuring transactions, securing funding, or reviewing monetisation proposals.

Transferable SBLC / BG

A transferable SBLC or BG allows the beneficiary to transfer the right to draw under the instrument to another party.

Key characteristics:

• The instrument must explicitly state that it is “transferable”
• Transfer must be processed through the issuing bank
• Only the beneficiary may request the transfer
• The terms of the original instrument remain unchanged
• Transfer is typically permitted once unless otherwise stated

When an SBLC is transferable, the right to claim payment may be legally moved to a new beneficiary, subject to the instrument’s wording and governing rules (such as ISP98 or URDG 758).

If the instrument does not clearly state “transferable,” it is not transferable.

Assignable SBLC / BG

An assignment is different from a transfer.

In most cases, assignment refers to the assignment of proceeds only — meaning the beneficiary may assign the right to receive payment if a claim is made.

Important distinctions:

• The underlying beneficiary does not change
• The instrument itself remains in the original beneficiary’s name
• Only the proceeds (if paid) are directed to another party
• Bank consent may be required

Assignment does not transfer control of the instrument. It simply redirects potential payment.

Why the Distinction Matters

The difference between transfer and assignment has significant legal and structural implications.

Transferable:
• Changes the party entitled to draw under the instrument

Assignable:
• Does not change the beneficiary
• Only affects who receives funds upon payment

In project finance and structured transactions, misunderstanding this distinction can create legal exposure or compliance risk.

Professional Considerations

Before relying on an SBLC or BG for financing, credit enhancement, or monetisation, it is essential to confirm:

• Whether the instrument explicitly states “transferable”
• Whether assignment of proceeds is permitted
• The governing rules (ISP98 or URDG 758)
• The issuing bank’s transfer procedures
• Any limitations or conditions attached

Institutional-grade due diligence should always include bank-to-bank verification and legal review.