EXAMPLES OF TRANFERABLES AND BACK TO BACKS

by Old Man on Wednesday, November 16, 2011 at 10:23am

QUESTION FROM AVRAHAM

Dear Mr. Old Man,
I am looking for an example to a TRANSFERABLE letter of credit , And / Or to an example of a BACK TO BACK letter of credit.

Do you know where can I find these examples to MASTER L/C and to SLAVE L/C ?????

BR
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ANSWER
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Dear Avraham,
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I have written some articles regarding transferable L/Cs, back to back L/Cs… However, most of them are in my mother tongue, i.e., Vietnamese. Therefore, I need time to translate them into English.
Transferable and transferred L/C are one and same L/C except for some changes as provided in sub-article 38(g) whereas back to back L/C transaction is involved two separate L/Cs which may be called “master L/C” and “baby L/C” or “slave L/C”.

For the time being, I’m rather busy, hence, I just provide you with a quick excerpt of related articles from my blog. Hoping it is helpful.
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An example of a back to back LC transaction

A trader (middle businessman) may wish to pay a supplier by transferring a sum owed to him under an LC even though the LC is not transferable. This can be done under a special arrangement called back-to-back LC.

The trader’s bank issues a second LC in favour of the supplier based on the security of the previous LC issued in favour of the trader. The bank is prepared to do so if the additional risks can be covered. Therefore, it insists on being nominated as paying bank for the second credit.
The bank also needs to be sure that there will be a smooth exchange of invoice because the original LC in favour of the the trader can not be settled on the strength of the supplier’s invoice from the second LC.

Please note UCP has no articles dealing with this special arrangement.
To illustrate the process, you are invited to observe the following example:

A Vietnamese importer requests his bank in Vietnam, e.g., Vietcombank Danang to issue an LC in favour of a trader in Hong Kong to import the goods produced in China.

As the Hong Kong trader is just a middle man, he must import the goods from a Chinese supplier to re-sell to the Vietnamese importer. But the Hong Kong trader does not have enough funds to pay the Chinese supplier. Therefore, he uses the LC issued by Vietcombank Danang in favour of himself as a security for his bank in Hong Kong, e.g., Cathay Bank Ltd Hong Kong, to issue an LC in favour of the Chinese supplier. This new LC is called a back-to-back LC.

Upon receipt of this LC, the Chinese supplier effects the shipment and presents the documents to his bank in China for negotiation. After negotiating (purchasing) the documents, the Chinese bank will forward the documents to Cathay Bank Ltd Hong Kong for reimbursement.

Upon receipt of the documents, the import division of Cathay Bank Ltd Hong Kong will examine the documents and send the documents together with the advice of the draft value to be paid by the Hong Kong trader to the export division of Cathay Bank Ltd Hong Kong. The Hong Kong trader is requested to present his draft and invoice to Cathay bank Ltd. Hong Kong. If the documents examined are complying with the terms of the export LC issued by Vietcombank Danang, Cathay Bank Ltd Hong Kong uses this proceeds to pay to the import division of this bank for the amount equivalent to the total amount paid to the beneficiary in China under the back-to-back LC. Then Cathay Bank Ltd Hong Kong will credit the Hong Kong Trader’s account for the difference (profit earned from the transaction).

Eventually, the documents are to be forwarded to Vietcombank Danang for payment/reimbursement. When the documents are taken up by the Vietnamese importer, the transaction are regarded as completed.

The trader is often facing dificulty in handling documents, especially the bill of lading. B/Ls prepared by a third party normally contain discrepancies such as:

* not complying with LC terms
* wrong endorsement
* not fully presented
* C/P presented

To avoid said discrepancies, the trader must be sure that the terms and conditions of the back-to-back LC must be based on relevant terms and conditions of the LC issued the final importer’s bank.

In practice, a middle trader prefers transferable LCs to back-to-back LCs. He just applies for a back-to-back LC when the LC issued by the importer’s bank is not transferable.
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An example of a reciprocal L/C transaction

Regarding the terms “master L/C” and “slave L/C or “baby L/C”, these terms can be used in back to back L/C transactions or reciprocal L/C transactions. The following example can help clarify the process of a reciprocal L/C transaction:

Shingbang Co (Korea) and Garment Processing Co (Vietnam) have signed a garment processing contract under which Shingbang will open an L/C payable at sight in favour of Garment Processing Co to import finished products and Garment Processing Co will open a usance L/C payable at 90 days sight in favour of Shingbang Co to import materials. The L/C opened by Shingbang Co may be called as “master L/C” whereas the L/C opened by Garment Processing Co may be called as “slavery or baby L/C”.
Upon receipt of the L/C issued by Korean bank, e.g., Korean Exchange Bank, Garment Processing Co requests his bank, e.g., Vietcombank to issue an L/C payable at 90 days sight in reciprocal to the master L/C. The reciprocal L/C issued by Vietcombank may have a payment condition as follows: “This L/C is reciprocal to Master L/C no… dated … issued by Korea Exchange Bank. Upon receipt of the documents complying with the credit terms and conditions, we shall incur a deferred payment undertaking but the payment when due shall be effected only after our full receipt of the proceeds under Master L/C no…. dated ….

Reciprocal L/Cs were rather popular in some Asian countries in 1990s.
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By the way, please follow the following links to find out more examples of back to backs and transferables:

http://lcviews.com/ravi_articles/GTR_Sept_Oct_04-LCs.pdf
http://www.lcviews.com/back_to_back_lc.htm
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Hoping it’s helpful and informative.
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Best regards,
Mr. Old Man