STANDBY LETTERS OF CREDIT

While a commercial letter of credit is used to effect payment for goods and services, the standby letter of credit serves as an assurance that the applicant (the issuing bank's customer) will fulfill its obligations under a contract. In other words, the beneficiary draws on a standby ONLY when the applicant fails to meet its obligations. The Comptroller of the Currency defines standbys as "any" letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer:

• To repay money borrowed or advanced to or for the account of the account party
• To make payment on account of an indebtedness undertaken by the account party
• To make payment on account of any default by the account party in the performance of any obligation

In the first case, the bank issuing the standby credit agrees to repay the funds borrowed or advanced in the event the applicant fails to do so. For example, a U.S. bank which finances the local subsidiary of a foreign corporation may require a standby payable to the bank from the foreign corporation's bank to support the loan. In the event the local subsidiary fails to repay the loan, the U.S. bank is able to draw on the standby to recover unpaid loans.

Standbys may also be used to assure payment of invoices for sales made an open account. The buyer has his bank issue a standby to the seller with the provisions that the standby may be drawn on if outstanding bills are not paid within a specified period of time. If the buyer fails to pay when the original invoice is due, the seller can draw on the standby, usually by presenting a draft, copies of the unpaid invoices and a statement certifying that the invoices are unpaid.

A third common use for standbys is to be used as bid or performance bonds. The company bidding on a contract to provide merchandise or services may be required to post a bond (the standby) which is forfeited (drawn upon) if the company fails to fulfill the terms of the bid award.

Standbys are also used to assure performance under a contract. For instance, standby credits may be offered by building contractors to assure compliance with local, state or federal regulations and building codes. This type of standby, commonly called a "performance bond" may also be used to assure timely delivery of merchandise, quality of goods or services provided.

Both bid and performance bond standbys are usually payable upon presentation of a draft accompanied by a statement indicating that the applicant has failed to perform according to the underlying bid award, contract or agreement.

Guarantee
Some countries may require a bank issued guarantee as an alternative to a standby to support or facilitate a contract. Through our London Branch trade processing center, Wachovia can support guarantee issuance for our corporate clients. We can also assist in proving local 'in-country' guarantees by tapping our extensive international correspondent network. Contact the Import and Export Trade Services offce in London for more information.

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