How to Raise Collateral and Secure an SBLC

A standby letter of credit is a contingent bank obligation. For the issuing bank, the central credit question is therefore the same as with any funded or contingent facility: who reimburses the bank if the exposure crystallizes?

Where an applicant has sufficient balance-sheet capacity, the bank may approve an SBLC under an existing or newly established credit facility. Where the applicant cannot support the exposure from its own credit profile, additional collateral may be required.

In that situation, the transaction should be separated into two distinct workstreams. The first is the capitalization of the collateral requirement. The second is the bank underwriting and SBLC issuance process.

The sequence matters. The collateral structure should be established before the applicant expects an issuing institution to approve the SBLC.

Understand the Bank's Exposure First

An SBLC creates contingent exposure for the issuing institution. If the beneficiary makes a complying presentation, the bank can become obligated to pay under the instrument.

The applicant therefore has a reimbursement obligation to the bank. The credit analysis focuses on the applicant's capacity to satisfy that reimbursement obligation.

An issuing institution can support the exposure using the applicant's general credit capacity. It can also require cash collateral, securities, guarantees or another acceptable credit support package.

The required structure depends on the applicant and transaction. It also depends on the issuing institution's internal credit policy.

The Transaction Has Two Distinct Financing Layers

Phase 1: Define the Underlying Commercial Obligation

The process starts with the transaction that requires the standby.

The applicant should identify the beneficiary and the obligation being secured. The required face value and tenor should also be established.

The proposed drawing conditions are equally important. They determine the circumstances under which the bank can be required to honor the instrument.

Financely supports qualifying transactions through its standby letter of credit advisory practice.

Phase 2: Determine the Required Credit Support

The next question is how the proposed bank exposure will be supported.

The answer is applicant-specific. A well-capitalized operating company may qualify for an unsecured or partially secured facility.

Another applicant may require significant collateral. A newly established SPV can face an even greater collateral requirement because it has limited standalone credit history.

The expected collateral requirement should therefore be established before launching an external capital raise.

Phase 3: Quantify the Collateral Shortfall

The financing requirement is the difference between the support required for the SBLC and the support already available from the applicant.

Consider an illustrative USD 10 million standby requirement.

In this example, the immediate capital requirement is USD 5 million. The financing mandate should therefore focus first on capitalizing that shortfall.

Phase 4: Structure the Collateral Capital

External collateral is capital at risk. Its provider therefore needs an identifiable return and a defined risk position.

The appropriate structure depends on the assets and cash flows available within the broader transaction.

What Makes the Collateral Raise Financeable?

A collateral raise requires more than an SBLC application. The capital provider needs to underwrite the economics that sit behind the request.

The provider will assess the applicant and underlying contract. It will also assess the source of repayment and the security available to protect its capital.

A stronger structure usually has a clear commercial purpose and a defined cash flow. It also allocates risk between the applicant and external capital provider.

The Capital Provider Is Underwriting Its Own Exposure

The party providing collateral is taking a separate investment or credit risk.

Its exposure should therefore be analyzed independently from the issuing bank's exposure.

The capital provider can require security over assets or contractual cash flows. It can also require covenants and other negotiated protections.

The resulting structure should be capable of being documented before the capital is committed to the SBLC facility.

Phase 5: Prepare the Collateral Financing Package

Financely structures the collateral requirement as a capital raising transaction.

The financing package needs to show where the capital sits within the transaction. It should also explain how it is deployed and how the capital provider is repaid.

The package can include:

• Applicant corporate information
• Historical financial statements
• Management accounts
• Underlying commercial agreement
• Beneficiary requirement
• Requested SBLC amount
• Expected collateral requirement
• Sponsor contribution
• External capital requirement
• Transaction cash flow
• Repayment source
• Security package
• Capital provider economics
• Exit or release mechanics

Financely can also support capital raising document preparation where a dedicated financing package is required.

Phase 6: Secure the Collateral Commitment

Once the structure is established, the capital raise can be taken to suitable lenders or investors.

The capital source will conduct its own underwriting. This can include financial diligence and legal review.

Negotiations should establish the amount committed and the conditions to funding. The security package and economics should also be documented.

The objective at this stage is to establish a credible capital structure that can be incorporated into the subsequent bank application.

Phase 7: Prepare the SBLC Application

The issuance workstream begins once the collateral structure is sufficiently developed.

The application now presents a materially different credit proposition. The applicant can show the proposed bank how the contingent exposure will be supported.

The submission can include the applicant's financial information and corporate documents. It can also include the collateral structure and underlying commercial obligation.

Financely offers SBLC application packaging for qualifying transactions.

Phase 8: Select the Issuing Institution

Bank selection should follow the credit structure.

Institutions have different appetite for applicant profiles and transaction types. They can also apply different collateral policies.

The objective is to approach an institution whose underwriting parameters fit the proposed exposure.

Financely can support qualifying applicants seeking a secured SBLC facility.

Phase 9: Complete Bank Credit Underwriting

The proposed issuer will perform its own credit analysis.

The bank can assess the applicant and collateral source. It can also review the underlying commercial obligation and beneficiary.

KYC and sanctions screening form part of the process. Source-of-funds analysis can apply to externally provided collateral.

The bank ultimately decides whether the complete structure meets its credit policy.

Phase 10: Finalize the Reimbursement and Security Structure

The applicant's reimbursement obligation sits behind the standby facility.

The bank documents its rights against the applicant and agreed collateral. Where third-party support is involved, additional documentation may be required.

The collateral provider may also have security or contractual rights against the applicant.

These arrangements should function together as one coherent capital structure.

Phase 11: Finalize the SBLC Wording

The instrument wording determines the bank's obligation to the beneficiary.

The face amount and expiry need to match the supported obligation. Drawing conditions should also be understood by the applicant and issuing institution.

Counsel may be required where the standby supports a complex contractual obligation.

Phase 12: Complete Approved Issuance

The issuing institution can proceed once its credit conditions and documentation requirements have been satisfied.

The final instrument is issued under the approved structure. The bank then maintains a contingent exposure for the life of the SBLC.

Financely's SBLC and Bank Guarantee Desk supports qualifying issuance mandates.

The Procedure in One View

Financely Retainer Structure

Where the applicant needs both collateral capital and an SBLC, Financely treats the engagement as two related structured finance workstreams.

The first workstream addresses the capitalization of the collateral requirement. The second addresses the bank instrument and issuance process.

What the SBLC Retainer Covers

The SBLC advisory retainer funds the professional resources allocated to the bank instrument workstream.

What the USD 15,000 Collateral-Raising Retainer Covers

The collateral mandate is a structured capital raising exercise.

Financely evaluates the amount required and the risk being assumed by the outside capital provider. The transaction is then structured for appropriate debt or equity capital.

Why the Retainers Are Separate

The collateral provider and the issuing bank are underwriting different risks.

The collateral provider underwrites the capital it contributes. The issuing bank underwrites the contingent exposure created by the SBLC.

Each process has its own diligence and documentation. Each can also involve separate investment committees or credit committees.

Treating them as separate workstreams creates a cleaner transaction structure and a clearer allocation of responsibilities.

Illustrative Combined Mandate

Consider a sponsor that requires a USD 20 million SBLC for a documented commercial obligation.

The proposed issuing structure requires USD 15 million of acceptable collateral. The sponsor can contribute USD 5 million.

The transaction therefore has a USD 10 million collateral capitalization requirement before the SBLC facility can be fully structured.

Professionals Involved in the Transaction

A collateral-backed SBLC can require professionals across structured finance and credit. Legal and compliance expertise can also be required.

These figures are illustrative professional rate ranges. They are provided to demonstrate the level of specialist resources that a structured transaction can require.

What Financely Requires at Intake

Financely reviews the underlying transaction before determining the appropriate mandate.

• Applicant legal name and jurisdiction
• Ownership structure
• Historical financial statements
• Current management accounts
• Requested SBLC face value
• Beneficiary identity
• Underlying contract
• Required SBLC wording where available
• Requested tenor
• Available applicant collateral
• Existing banking facilities
• Estimated external collateral requirement
• Repayment source
• Available security

What Happens When the Applicant Has No Collateral?

An applicant with no available collateral should begin with the capital structure rather than the instrument.

The underlying business or transaction must support a financeable capital raise. External investors or lenders will evaluate the economics before committing capital.

Where the transaction supports outside capital, the collateral requirement can be structured as the first financing layer. The SBLC facility can then be addressed after that layer is sufficiently developed.

Companies requiring broader capital support can review Financely's structured capital raising for complex transactions.

SBLC Approval Still Depends on the Issuing Institution

A completed collateral raise can materially improve the credit structure. The issuing institution still retains its own approval authority.

The bank can assess the applicant and transaction independently. It can also impose additional conditions before issuance.

Collateral acceptance itself remains subject to the bank's requirements.

How Financely Executes the Mandate

Frequently Asked Questions

Should collateral be raised before applying for an SBLC?

Where the applicant cannot satisfy the expected collateral requirement from its own resources, the collateral capitalization should generally be structured first. The SBLC application can then proceed with a defined credit support package.

Why does a bank require collateral for an SBLC?

An issuing bank assumes contingent credit exposure under the SBLC. The bank therefore assesses how it will be reimbursed following a compliant drawing.

Does every SBLC require 100% cash collateral?

Collateral requirements depend on the applicant and issuing institution. Strong corporate borrowers can receive credit treatment that differs materially from a newly established or thinly capitalized applicant.

How can collateral for an SBLC be financed?

Potential sources can include sponsor capital and outside equity. Secured private credit, eligible financial collateral and other structured support can also be considered.

What is Financely's SBLC advisory retainer?

Financely's SBLC advisory retainer generally ranges from USD 25,000 to USD 75,000. The final retainer depends on the structure and professional scope required.

What does Financely charge when collateral also needs to be raised?

An additional USD 15,000 collateral-raising retainer applies where Financely is also mandated to structure and support the external capital raise.

What does the SBLC retainer cover?

The scope can include credit assessment and transaction structuring. It can also include application packaging, issuer placement and execution support.

What does the collateral-raising retainer cover?

The workstream includes collateral-gap analysis and capital structuring. It can also include financing materials, capital provider mapping and placement support.

Are capital-provider fees included in the retainer?

Third-party lender, investor, legal and banking costs are separate unless expressly included in the engagement. Transaction or finder fees may also apply under agreed terms.

Does paying the retainer guarantee that collateral will be raised?

External capital remains subject to investor or lender underwriting. Financely performs the mandate on a best-efforts basis.

Does raising the collateral guarantee SBLC issuance?

The issuing institution retains final credit approval. Issuance also remains subject to collateral acceptance, documentation and compliance requirements.

Can an SPV obtain an SBLC?

An SPV can potentially participate in an SBLC structure. Its limited standalone credit history can make sponsor support and collateral particularly important to bank underwriting.

This article is provided for general informational purposes. Collateral requirements and bank credit policies vary by applicant, jurisdiction and issuing institution. The examples above are illustrative. Financely does not guarantee capital placement or SBLC issuance. Financely is not a bank, lender, issuing institution, broker-dealer, investment adviser or custodian. Services are provided on a best-efforts and mandate-based basis. Transactions remain subject to KYC, AML, sanctions screening, underwriting, collateral acceptance, documentation and final provider approval. Third-party costs and transaction fees may apply under separate engagement terms.