Why Do Letters of Credit (LCs) Reduce Revolver Availability?

Hi there,

According to the R&P book, LCs reduce revolver facility availability Can anybody explain why?

(My thought process was that the LC reduces the revolver because the lender is already going to be providing you with capital per the LC and therefore the revolver is reduced in available capital to lend)

Thanks guys!

 

You can't just go issuing LCs willy-nilly....

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

What is the difference between a letter of credit and the revolver itself? I know they reduce revolver availability, but I'm not understanding what the purpose is. What benefit does issuing an LoC have over just drawing from the revolver?

Only reason I can think of is that using an LoC wouldn't accrue interest in the same way as a revolver draw, but idk 

 

Previous sa in LF so I can say that one, interest accrues differently (and at diff rates), and purpose is different as RCFs are more for short term (sometimes emergency) financing needs and are usually left undrawn at end of period, and wouldn’t be able to fill a bigger project’s financing needs. I’m sure there’s more but that’s my 0.02.

 
Most Helpful

Totam voluptatem accusantium perspiciatis nemo molestiae corporis corporis numquam. Et magni deserunt rerum praesentium dicta recusandae.

Porro similique tempora deserunt est ipsam blanditiis. Fugiat perferendis qui dolor. Iusto omnis id occaecati. Aut pariatur assumenda expedita omnis qui quia. Quo et praesentium commodi. Nihil eligendi sint et.

Career Advancement Opportunities

June 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Perella Weinberg Partners New 98.9%
  • Lazard Freres 01 98.3%
  • Harris Williams & Co. 24 97.7%
  • Goldman Sachs 17 97.1%

Overall Employee Satisfaction

June 2024 Investment Banking

  • Harris Williams & Co. 19 99.4%
  • JPMorgan Chase 10 98.9%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 05 97.7%
  • Moelis & Company 01 97.1%

Professional Growth Opportunities

June 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.9%
  • Perella Weinberg Partners 18 98.3%
  • Goldman Sachs 16 97.7%
  • Moelis & Company 05 97.1%

Total Avg Compensation

June 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (22) $375
  • Associates (93) $259
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (69) $168
  • 1st Year Analyst (206) $159
  • Intern/Summer Analyst (149) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
dosk17's picture
dosk17
98.9
6
CompBanker's picture
CompBanker
98.9
7
kanon's picture
kanon
98.9
8
GameTheory's picture
GameTheory
98.9
9
numi's picture
numi
98.8
10
DrApeman's picture
DrApeman
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”