Transferable letter of credit explained

A transferable letter of credit is a documentary credit that specifically states it is transferable, so that the first beneficiary may request that the credit be made available in whole or in part to a second beneficiary. Under UCP 600 Article 38, transferability is a defined mechanism, not an implied right arising from a trading chain.

The structure is used where an intermediary seller needs the buyer's bank undertaking to support payment to an upstream supplier, without issuing a second independent credit. Transfer changes who may draw under the credit. It is distinct from assignment of proceeds and from back to back issuance of a separate credit.

Transferable letter of credit under UCP 600

UCP 600 applies when a credit expressly indicates that it is subject to those rules. Article 38 then supplies the institutional vocabulary.

A transferable credit means a credit that specifically states it is "transferable". A transferable credit may be made available in whole or in part to another beneficiary (the second beneficiary) at the request of the beneficiary (the first beneficiary). Words of similar commercial intent without that specific statement do not create a transferable credit under the article's definition.

A transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorised by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank. A bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bank.

Unless otherwise agreed at the time of transfer, all charges incurred in respect of a transfer must be paid by the first beneficiary. A credit may be transferred in part to more than one second beneficiary provided partial drawings or shipments are allowed. A transferred credit cannot be transferred at the request of a second beneficiary to any subsequent beneficiary. The first beneficiary is not considered to be a subsequent beneficiary.

Terms that may change on transfer

The transferred credit must accurately reflect the terms and conditions of the original credit, including confirmation, if any, with limited exceptions. Under Article 38, any or all of the following may be reduced or curtailed:

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

The percentage for which insurance cover must be effected may be increased to provide the amount of cover stipulated in the credit or the articles. The name of the first beneficiary may be substituted for that of the applicant in the credit. If the name of the applicant is specifically required by the credit to appear in any document other than the invoice, that requirement must be reflected in the transferred credit.

Those permitted changes allow the intermediary to protect margin and manage timing while keeping the documentary chain workable for the second beneficiary.

Invoice substitution and presentation

The first beneficiary has the right to substitute its own invoice and draft, if any, for those of a second beneficiary for an amount not in excess of that stipulated in the credit. Upon such substitution, the first beneficiary can draw under the credit for the difference, if any, between its invoice and the invoice of the second beneficiary.

If the first beneficiary is to present its own invoice and draft but fails to do so on first demand, or if the invoices presented by the first beneficiary create discrepancies that did not exist in the second beneficiary's presentation and are not corrected on first demand, the transferring bank has the right to present the documents as received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.

Presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank. The first beneficiary may, in its request for transfer, indicate that honour or negotiation is to be effected to a second beneficiary at the place to which the credit has been transferred, up to and including the expiry date of the credit, without prejudice to the first beneficiary's substitution rights.

Any request for transfer must indicate if and under what conditions amendments may be advised to the second beneficiary. The transferred credit must clearly indicate those conditions. If a credit is transferred to more than one second beneficiary, rejection of an amendment by one second beneficiary does not invalidate acceptance by another.

Transfer compared with assignment of proceeds

UCP 600 Article 39 states that the fact that a credit is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, in accordance with applicable law. Article 39 relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit.

That distinction is central for credit analysis. Transfer makes a second beneficiary a party who may present documents and draw. Assignment of proceeds reallocates payment of proceeds without transferring the right to perform. A non transferable credit may still support an assignment of proceeds under local law. It does not, by that fact alone, become transferable.

Export finance context

Transferable credits are short term documentary instruments used in merchandise and intermediate trade. They sit beside supplier credit, where an exporter extends time to the buyer, and buyer credit, where a lender finances an overseas buyer.

An export credit agency product such as the UKEF Buyer Credit Facility is a different structure. UKEF describes that facility as a guarantee to a bank making a loan to an overseas buyer for capital goods, services or intangibles, typically with repayment over two years or longer, while the exporter is paid as under a cash contract. Transfer under UCP 600 does not create that medium term loan guarantee.

Credit desk reading

For bank desks, a transferable letter of credit analysis asks whether the credit specifically states that it is transferable, which bank has consented to transfer, which terms have been reduced or curtailed, how amendments will be handled for second beneficiaries, and whether invoice substitution is expected. It also distinguishes transfer from assignment of proceeds and from any separate ECA buyer credit that may appear in the same commercial relationship.

Those points are definitional under UCP 600. They determine who may present, who is bound, and how margin between first and second beneficiary invoices is realised.