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!
Do you mean Letters of Credit?
In the case of Letters of Credit, it could be considered a sublimit of the revolver and thus would reduce the amount of availability.
Yes. That answer my question! Thanks -- (sorry for the typo earlier!)
You can't just go issuing LCs willy-nilly....
lol
WOW - So sorry! That was a typo!!! I meant Letters of Credit!!!
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
bump
Bump
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.
Itaque repudiandae et ullam dignissimos molestias fugiat omnis. Rem incidunt harum accusantium corporis sapiente ea. Placeat sunt dolores aliquid ratione nam et. Officia qui asperiores enim reprehenderit perferendis aperiam ipsum. Commodi distinctio totam est temporibus aut. Voluptatem sint voluptas deleniti quis tempore repellendus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...