Are synthetic letters of credit widely used? What are the negatives for a beneficiary who accepts one as collateral? If I understand correctly, the cost to the borrower is a facility fee plus the interest generated from the funds supporting the LC placed in escrow.
Thanks for any information you can provide.
Kerry, in a technical sense, since funds borrowed via a synthetic letter of credit are available immediately, they're usually considered a more "liquid" source of funds to the borrower than a standard letter of credit. The proceeds are therefore considered more secure, as there is no counterparty
However, in practice (in my experience, at least), I don't really see any difference between a synthetic letter of credit and an irrevocable LOC -- except -- when my bank, due to my company's liquidity, requires me to post a deposit or CD or other "anchor" to ensure we can meet the LOCs obligations.
As to the cost, it is certainly a facility fee, but additionally because the interest generated is seen as an opportunity cost to the lender, it is typically added to the borrower's cost base.
