Expanded Opportunities for Letters of Credit
last updated on Monday, October 18, 2021 in Letters of Credit
While FHLB Des Moines Letters of Credit (LOC) are commonly used as an attractive alternative to pledging securities for public unit deposits, an LOC can serve a variety of purposes, including satisfaction of the performance obligations of our members and their customers.
By taking advantage of FHLB Des Moines Aaa/AA+ rating and competitive pricing, members can help lower costs for their municipality, encourage growth and improvement in their community or use proceeds from bond issuances to finance a range of community projects.
Detailed below are three example scenarios where FHLB Des Moines members have leveraged expanded uses of LOCs to provide solutions that help customers achieve their goals and further cement customer relationships.
On the Front Lines
A bank member had a customer who operated a trucking fleet. The customer informed their lending officer they had elected to self-insure and retain more property and casualty exposure. To do so, the fleet operator structured a self-insurance program that paid first dollar claims directly out of its own treasury, while contracting out potentially large losses to the insurance market.
It’s not unusual for high-deductible insurance programs to require collateral in order to validate that an insured business can meet its self-insured claims obligations. To do this, the insurance company negotiated a guarantee structure in which the member would issue an irrevocable letter of credit to the insurance company as the beneficiary. An FHLB Des Moines Confirming LOC readily fit the bill with its long-term “Aaa/AA+” debt ratings that met the beneficiary’s guarantee requirements.
By using an FHLB Des Moines LOC, the member was able to provide an easy solution for their customer.
Standing Behind our Members
A community bank member was working with a customer who entered into a futures swap with a partner to hedge their contracts on crude oil. The partner company required a letter of credit as security to ensure that the customer would be able to meet its obligations under the contract. Our member was able to provide the customer with a letter of credit. However, because this bank was not a nationally known entity, the partner company needed additional assurances.
As an FHLB Des Moines member, this bank was able to leverage a confirming LOC to support its own letter of credit, which allowed the customer to complete the transaction.
FHLB Des Moines stands behind our members, and through an LOC our members can, in turn, continue to stand behind their customers.
A credit union member had a construction loan with a customer whose loan was going to be taken out by a larger loan from Freddie Mac. However, because the project involved construction of rental properties and the rent rolls were not yet confirmed, Freddie Mac required an LOC as security until the rent rolls were established.
The member was able to utilize a confirming LOC provided by FHLB Des Moines as a safety net for their customer’s construction loan until the property's tenant base and income was established. The guarantee structure was accepted by Freddie Mac and the loan was able to be funded.
Ready to Explore LOC Opportunities?
In addition to the commonly used purpose of backing the uninsured portions of public unit deposits, the scenarios above demonstrate a few examples of how FHLB Des Moines LOCs can further enable our members, their customers and businesses to achieve their goals.
Learn more about the benefits of our Standby LOC and Confirming LOC or contact your Relationship Manager to explore how these expanded LOC uses can help you serve your customers and your community.
- Confirming Letter of Credit
- Letters of Credit