CoachA letter of credit is an undertaking by a bank, issued at the request of a buyer, to pay the seller a stated amount when the seller presents documents that conform to its terms (the bill of lading, invoices, inspection certificates): it replaces the buyer’s credit by the bank’s.
Exemples
Example 13.8 (What a letter of credit must cover)
A seller has delivered EUR 3 million of energy not yet paid, and the remaining deliveries under its contract would cost EUR 1 million less to replace today than their contract price, so the buyer’s default would cost the seller nothing on them. With a letter of credit of EUR 2 million, EUR 1 million is uncovered. Had the replacement cost been EUR 0.5 million more than the contract price, the uncovered exposure would be EUR 1.5 million.