Can a Transferred Letter of Credit Have a Shorter Usance Period Than the Original Credit?

A transferable letter of credit allows the first beneficiary to transfer all or part of its rights under the credit to a second beneficiary. While UCP 600 permits certain terms of the transferred credit to be reduced or curtailed, not every provision may be changed.

In this Q&A, a reader asks whether the deferred payment period in a transferred credit can be shortened from 180 days to 60 days, whether such a structure would result in two different payment dates, and whether both beneficiaries may obtain discounting after the issuing bank has incurred its deferred payment undertaking.

Question

Dear Mr. Old Man,

I hope you are doing well.

I have a query regarding a transferable letter of credit and would appreciate your comments.

Background

1. Bank A issues a transferable letter of credit in favour of Beneficiary 1 (the first beneficiary).
2. The credit is available without confirmation.
3. The credit is payable at 180 days from the bill of lading date.
4. The credit is transferred to Beneficiary 2 (the second beneficiary).
5. The first beneficiary intends to substitute its own invoice for that of the second beneficiary.

Questions

1. Can the transferred credit issued to the second beneficiary provide for a usance period of 60 days from the bill of lading date instead of 180 days?
2. If so, would the second beneficiary be paid at 60 days from the bill of lading date while the first beneficiary is paid at 180 days?
3. Would the issuing bank then make two separate payments—one at 60 days and another at 180 days from the bill of lading date?
4. After the issuing bank has accepted the deferred payment undertaking, can both the first beneficiary and the second beneficiary approach either the transferring bank or another bank to obtain discounting?

P.S. This transaction relates to a major project financing arrangement funded by a consortium of banks. The financing period is three years.

Best regards,

Arun Ambar

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Answer

Dear Arun,

Thank you for your interesting question.

1. Can the transferred credit provide for a usance period of 60 days instead of 180 days?

No.

Sub-article 38(g) of UCP 600 provides that a transferred credit must accurately reflect the terms and conditions of the original credit, including any confirmation, except that the following may be reduced or curtailed:

• the amount of the credit;
• any unit price stated therein;
• the expiry date;
• the period for presentation; and
• the latest shipment date or any given period for shipment.

The deferred payment (usance) period is not one of the terms that may be amended.

Conclusion

The transferred credit cannot change the deferred payment term from 180 days from the bill of lading date to 60 days from the bill of lading date.

2. Will the second beneficiary be paid at 60 days while the first beneficiary is paid at 180 days?

No.

Since the transferred credit cannot alter the deferred payment period, both the original credit and the transferred credit must remain payable at 180 days from the bill of lading date.

In addition, unless the transferring bank has added its confirmation (or otherwise undertaken to pay earlier under a separate financing arrangement), the transferring bank is generally expected to remit proceeds to the first or second beneficiary only after it receives reimbursement from the issuing bank.

Conclusion

The answer is No. The second beneficiary cannot be entitled to payment at 60 days while the first beneficiary is paid at 180 days merely by virtue of the transfer.

3. 3. Will the issuing bank make two separate payments—one at 60 days and another at 180 days?

Not in the circumstances described.

The issuing bank is bound by the terms of the original credit. If the original credit provides for a single deferred payment at 180 days from the bill of lading date, the issuing bank will make only that payment.

There would be two separate payments only if the original credit itself expressly provides for payment by instalments.

For example:

• First payment: 50% of the drawing amount at 60 days from the bill of lading date.
• Second payment: Remaining 50% at 180 days from the bill of lading date.

Absent such a provision, the issuing bank has no basis for making separate payments at different maturities.

4. Can both beneficiaries obtain discounting after the issuing bank has incurred its deferred payment undertaking?

Yes.

Once the issuing bank has incurred a valid deferred payment undertaking, either beneficiary may seek financing by requesting a bank to discount the future proceeds.

However, discounting is entirely a commercial decision of the bank approached. The bank may:

• agree or decline to discount;
• discount with recourse; or
• discount without recourse,

depending on its credit assessment and internal policies.

The discounting bank may be the transferring bank or another bank willing to provide such financing.

Best regards,

Mr. Old Man

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Further Question

Dear Mr. Old Man,

Thank you very much for your reply.

I initially thought that the wording in UCP 600 sub-article 38(g) — “any or all of which may be reduced or curtailed” — would also allow the deferred payment period to be reduced.

I would appreciate your views on how the following structure could be made to work:

• (a) The second beneficiary is willing to extend only 60 days’ credit to the first beneficiary and therefore wishes to receive payment after 60 days.
• (b) The first beneficiary is the trading company.
• (c) The issuing bank, which is financing the transaction, intends to make payment only after 180 days.
• (d) The usance interest for the 180-day financing is for the applicant’s account.

I would be grateful for your opinion on this structure. If possible, could you also suggest how the relevant LC clauses should be worded to achieve the intended commercial arrangement?

Best,

Arun Ambar

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Answer

Dear Arun,

Thank you for your follow-up question.

1. Does “any or all of which may be reduced or curtailed” include the deferred payment period?

No.

The words “any or all of which” refer only to the specific items listed immediately before them, namely:

• the amount of the credit;
• any unit price stated therein;
• the expiry date;
• the period for presentation; and
• the latest shipment date or any given period for shipment.

Accordingly, a transferred credit may reduce one, several, or all of these items. The deferred payment (usance) period is not included in this list and therefore cannot be shortened or extended under sub-article 38(g).

2. How can the proposed financing structure be achieved?

The simplest solution is to separate the letter of credit payment terms from the financing arrangement between the issuing bank and the applicant.

The original credit should provide for payment at 60 days from the bill of lading date. The transferred credit would then carry the same 60-day payment term, as required by UCP 600.

If the applicant requires 180-day financing, that should be arranged outside the letter of credit.

In other words:

• the issuing bank honours its obligation under the credit by paying at 60 days from the bill of lading date;
• the second beneficiary receives payment at 60 days;
• the first beneficiary receives the balance (if any) in accordance with the transfer arrangement; and
• the applicant reimburses the issuing bank only 180 days from the bill of lading date under a separate financing agreement.

This is, in substance, a post-import financing or buyer’s credit arrangement between the issuing bank and the applicant. It does not require the letter of credit itself to provide for a 180-day deferred payment.

Consequently, no special LC wording is required to create the 180-day financing. The financing terms should instead be documented in the credit facility or reimbursement agreement between the issuing bank and the applicant.

Best regards,

Mr. Old Man