Letter of Credit Guarantee
A Letter of Credit Guarantee protects a bank from commercial and/or political and/or sovereign risks related to a confirmed Letter of Credit. The confirming bank applies for the guarantee, which is available also when the Letter of Credit is confirmed without the issuing bank's authorization or request.
The commercial risks materialise when the confirming bank, at the latest on the due date, has not received payment of outstanding receivables that have fallen due in accordance with the terms of the letter of credit, and the delay is attributable to the issuing bank.
Political risks are caused by the issuing bank’s country. These risks are beyond the control of the parties to the letter of credit. Political risks include restrictions on transfer of currency, rescheduling of debts, war or insurrection, or the confiscation of goods in the issuing bank’s country.
Terms and conditions of the Letter of Credit Guarantee
The letter of credit must be irrevocable and subject to the Uniform Customs and Practice for Documentary Credits confirmed by the International Chamber of Commerce and valid at any single time. A Letter of Credit Guarantee is also available when the letter of credit is confirmed without the issuing bank’s authorisation or request.
Normal coverage scheme
Under the normal coverage scheme, the coverage can be 95 % for commercial and political risks. The remaining 5 % is a bank’s self-risk portion.
Under the risk-sharing scheme, the maximum coverage for commercial and political risks is 50%. In this case, the bank must assume a percentage of the risk determined by Finnvera, which is at least 15%. The bank may share the rest of its self-risk portion with other risk-takers.
In the normal coverage scheme, the premium is determined separately in each case. It depends on the creditworthiness of the issuing bank and the issuing bank’s country, as well as on the validity and payment terms of the letter of credit.
In the risk-sharing scheme, the premium is based directly on a fee (or fees) that the bank charges for confirming a letter of credit and that is acceptable to Finnvera. In addition to the premium, a handling fee is charged in both guarantee alternatives.
The beneficiary of the export credit guarantee, i.e. the Guarantee Holder, usually the exporter or the bank, submits a claim for indemnification based on an export credit guarantee with a signed written application. The applicant may also be the transferee of an indemnity right.