Wednesday, 21 September 2011

Transferable Letter of Credit

A Transferable Letter of Credit is used in cases where there are three parties to a transaction; an Importer (Buyer), Exporter (Supplier), and an intermediary party, such as a broker, who is responsible for arranging the sale.

In such a transaction, the intermediary party requests a Letter of Credit from the Importer as protection against non-payment. 

The Exporter, in turn, wants assurance from the intermediary party that payment will be made, and will also request a Letter of Credit. 

It may be the case, however, that the intermediary party has little working capital or does not have access to a line of credit with its bank to issue a separate Letter of Credit to the Exporter. As an alternative, the intermediary party may provide such assurance to the Exporter by transferring over a portion of the Letter of Credit it received from the Importer. This is termed a Transferable Letter of Credit.

To be able to transfer a Letter of Credit, the intermediary party must specifically request a Transferable Letter of Credit from the Importer.

The Letter of Credit must nominate a bank, generally the Advising Bank, who is authorized to effect a transfer.

The intermediary party would be the Beneficiary of the Letter of Credit and, in a Transferable Letter of Credit transaction, is referred to as the First Beneficiary. The First Beneficiary would then ask the Transferring Bank to transfer, in part or in full, its rights under the Letter of Credit to the manufacturer of the goods, who is referred to as the Second Beneficiary.

A Transferable Letter of Credit may be transferred only once; therefore, a Second Beneficiary is unable to transfer a portion of a Transferable Letter of Credit to a third beneficiary. It may, however, be transferred to more than one Second Beneficiary, in which case the L/C must state that partial shipments are allowed.

The following is a simplified example of a Transferable Letter of Credit transaction:

Importer: ABC Buyer, Hong Kong
Intermediary Party (Middleman): UK Trading Company Ltd
Supplier: XYZ Supplier Company Ltd, UK
Issuing Bank: WorldWide Bank
Transferring Bank: Big Bank UK PLC


As per ABC Buyer’s instructions, WorldWide Bank issued a Transferable Letter of Credit in favour of UK Trading Company Ltd who is acting as the intermediary party in the trade transaction. This Transferable Letter of Credit is in the amount of USD $100,000 and Big Bank UK is authorized and willing to do the transfer.



The description of goods is 5,000 pairs of shoes at USD $20 per pair. Once UK Trading Company Ltd as the First Beneficiary receives the Letter of Credit, it requests Big Bank UK to transfer USD $75,000 to XYZ Supplier Company, stating the same quantity of goods, 5,000 pairs of shoes, but at USD $15 per pair.


Big Bank UK advises the transfer has been made to XYZ Supplier Company Ltd, who now becomes the Secondary Beneficiary of the Letter of Credit.



Once XYZ Supplier Company Ltd has shipped the goods, it presents documents in accordance with the Transferable Letter of Credit, along with its draft for USD $75,000, to Big Bank UK. Big Bank UK then notifies UK Trading Company Ltd of the presentation.



UK Trading Company Ltd will present its own invoice and draft showing a value of USD $100,000 in order to comply with the original Letter of Credit. Big Bank UK checks the documents  then (if all in order) substitutes these documents for those presented by XYZ Supplier Company Ltd and forwards the documents to WorldWide Bank. 


Assuming all documents comply with the L/C terms, Big Bank UK receives USD$100,000 and pays USD $75,000 to XYZ Supplier Company Ltd and USD $25,000 to UK Trading Company Ltd.



Note:

  
It is advisable to request expert advice when requesting a Transferable Letter of Credit, particularly if you do not wish to run the risk of disclosure of names or values to the end buyer and supplier. It is possible to request that the L/C terms stipulate that documents are to be drawn up in such a way that this risk is minimised.



Banks will not however bear any responsibility for inadvertent disclosure within documentation once issued.


Transferable Credits are subject to UCP 600 Article 38.





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