Drawing on and ending a standby letter of credit

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1. When DSCA can draw

A standby letter of credit (SBLC) for termination liability (TL) matters most when something goes wrong. A demand for payment may be prepared by the regional division of the Defense Security Cooperation Agency (DSCA) and signed by its Chief Financial Officer, after coordination with the Director or Deputy Director (SAMM C9.9.1.5.4.17). The SBLC and any confirmation should each attach the form of demand to be used. How the instrument is set up is covered in setting up a standby letter of credit.

The manual lists the situations in which DSCA may issue a demand (SAMM C9.9.1.5.4.17). The first two are a written notice from the purchaser that it is terminating all or part of a case, and a written notice from the government that it is terminating a case or related contracts. The third is the SBLC or confirmation being terminated, or not extended past its expiry. The fourth is a contractor billing the government for termination charges on a case.

The rest concern eligibility and amount. They are the purchaser losing its dependable undertaking eligibility, and a bank falling below DSCA’s eligibility thresholds. The last is the purchaser failing to complete an agreed increase, or the issuing bank refusing it. A demand may be for all or part of the SBLC, and several drawings may be made, provided together they do not exceed the full amount (SAMM C9.9.1.5.4.17.1).

2. Presenting and paying a demand

DSCA gives the purchaser a copy of any demand it presents, as a courtesy (SAMM C9.9.1.5.4.18). Presentation uses any method the SBLC specifies. "No documentation other than the demand for payment shall be required for presentation to the applicable bank in order for that presentation to be complete" (SAMM C9.9.1.5.4.18). The bank cannot refuse payment by asking DSCA for more documents. The time within which it must pay is set by the SBLC and confirmation, and failing that by ISP 98 (SAMM C9.9.1.5.4.19).

The demand names the account for the payment (SAMM C9.9.1.5.4.20). The Defense Finance and Accounting Service credits the payment to the right cases and tells DSCA the deposit date and cases within three business days. DSCA acknowledges within one business day and confirms it approves how the payment was applied.

Each payment reduces what is left on the SBLC (SAMM C9.9.1.5.4.21). The manual’s example is an SBLC of $100M from which $42M is paid, leaving $58M for later drawings. The amount is restored only if the SBLC is amended.

3. Quarterly monitoring

DSCA monitors each SBLC and confirmation at least quarterly (SAMM C9.9.1.5.4.22). Each quarter it validates the SBLC amount against TL for the part of the program the SBLC covers (SAMM C9.9.1.5.4.22.1). Cases open and close while an SBLC is active, and that changes the TL requirement. The purchaser must hold enough cash reserves to cover any TL the SBLC does not, and the country finance director verifies that (SAMM C9.9.1.5.4.25).

4. Raising or lowering the amount

Every amendment needs DSCA approval before it is accepted, whatever prompted it (SAMM C9.9.1.5.4.23). Where an increase is needed, DSCA tells the purchaser in writing and allows 10 business days to choose between amending the SBLC and depositing the extra TL (SAMM C9.9.1.5.4.23.1.1). If the purchaser chooses an amendment, it asks the bank to reply within 15 business days. If the bank declines, or does not reply, the increase appears on the next quarterly bill unless a separate SBLC is obtained. If that bill is not paid on time, DSCA may sequester trust fund money to reserve the full TL.

A decrease may be recommended, for example where computed TL is more than 10 percent under the SBLC for two consecutive quarters (SAMM C9.9.1.5.4.23.1.2). The purchaser may approve the decrease or leave the amount as it is, replying in writing to the Chief Financial Officer. With no reply within 30 calendar days, DSCA does not send the decrease to the bank. The SBLC runs to a stated expiry date and extends itself automatically each year by one calendar year, unless notice of non-extension is given in advance (SAMM C9.9.1.5.4.23.2).

5. Transfer and early termination

Only DSCA may demand transfer of its rights as beneficiary (SAMM C9.9.1.5.4.26). Without its consent, neither the banks nor the purchaser can transfer the SBLC. Early termination also needs DSCA’s written consent (SAMM C9.9.1.5.4.27.1). Consent normally leads either to a demand for the remaining TL or to a bill to the purchaser, payable within 30 business days and before the SBLC ends.

If a bank stops meeting the eligibility criteria, DSCA tells the purchaser and may draw the remaining amount (SAMM C9.9.1.5.4.27.2). It may instead require a new SBLC from a qualifying bank, or require TL prepayments within 30 business days of notice. A purchaser must keep its dependable undertaking eligibility to keep an SBLC. If that is revoked, DSCA can draw the required TL before the SBLC finally ends (SAMM C9.9.1.5.4.27.3).

6. Closeout

Within 30 days of termination or expiry, the banks are asked to confirm in writing that the SBLC is closed and no longer carried as a contingent liability (SAMM C9.9.1.5.4.28). Within fifteen days of that notice, DSCA confirms the same and explains how future TL will be billed. It also instructs the implementing agencies on payment schedules and the Defense Finance and Accounting Service on billing. If a final demand does not cover all TL, the purchaser has 30 business days to pay the rest. A purchaser that chooses not to extend may, at least 30 business days before expiry, ask DSCA to draw the full TL or to use funds it makes available (SAMM C9.9.1.5.4.28.1).

Key terms

Demand for payment	The single document DSCA presents to a bank to draw on an SBLC or confirmation.
Drawdown	A payment drawn under the SBLC, which reduces the amount left for later drawings.
Automatic extension	The yearly one-year renewal of an SBLC unless notice of non-extension is given.
Sequestration	DSCA reserving trust fund money for TL when a bill for an increase goes unpaid.
Closeout	The written confirmations by banks and DSCA that an SBLC has ended.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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