THE WEST BENGAL NATIONAL UNIVERSITY OF JURIDICAL

SCIENCES, KOLKATA

COMMERCIAL INSTRUMENTS

THE ROLE OF BANK LETTER OF CREDIT IN CORPORATE TAX-

EXEMPT FINANCING

PATHLAVATH DIGVIJAY NAIK

216099
MONSOON SEMESTER 2019

1
Contents

Introduction ................................................................................................................................ 3

Scope and Usage of bank letter of credit in corporate tax-exempt financing ............................ 4

History and Role of Bank Letter of Credit and its linkage to the 2008 Financial Crisis ........... 7

Letter of Credit Vs. Bond Insurance Policy as Credit Enhancers .............................................. 9

Types of Letter of Credit which are used as Credit Enhancements ......................................... 11

Current scenario of bonds issued ............................................................................................. 13

Conclusion ............................................................................................................................... 14

Bibliography ............................................................................................................................ 16

2
 INTRODUCTION
An instrument known as credit enhancer which has various forms is used by the borrower to
increase his credit worthiness while issuing any kind of securities or any other type of financing
operations.1 These credit enhancers are used by issuers to increase the credit worthiness of the
issue as well as guarantee the lenders or investors of full and timely repayment and in the end
reduce the credit risk in such transactions.2 The author in this paper has limited the observations
to the credit enhancement property of the bank letter of credit. The bank letter of credit is
utilized for it being in the form of a credit enhancer which facilitates bond issuers to increase
the credit worthiness of their issue. In the current paper the author in the first part will determine
the scope and usage of the bank letter of credit in corporate tax-exemption financing. The
second part of the paper the author will trace the history of the role of the bank letter of credit
and its linkage to the 2008 financial crisis. In the third part the author shall compare the various
types of credit enhancers. In the fourth part the author shall look into the types of letter of credit
that is used as credit enhancer. In the fifth part the author shall elucidate the current status of
the use of a letter of credit as a credit enhancer. In the sixth part the author shall conclude the
paper along with recommendations.

1
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
2
Id.

3
 SCOPE AND USAGE OF BANK LETTER OF CREDIT IN CORPORATE
TAX-EXEMPT FINANCING
A letter of credit is one such form of credit enhancer that issuers use to increase the credit
worthiness of the issue as well as to reduce the risk to the investor in subscribing to such issue.
A letter of credit in simple terms refers to a guarantee from a bank guaranteeing that a buyer’s
payment to a seller shall be received in time and for the correct amount. In many situations, a
letter of credit is used by an issuer to act as a guarantee to an issue in case the issuer is unable
to repay the issue amount to the investor and in return for providing such letter of credit the
issuer shall give the bank certain costs for providing such a facility. This method of credit
enhancing is used widely in the case of municipal bonds. Municipals most often use industrial
revenue bonds to build facilities for corporations with lease payments from the corporations
which cover the interest and the principle.3 More often than not, municipalities use their credit
rating in order to obtain the tax-exempt financing.4 But most of these municipal bond issues
are issued with the help of backup bank letter of credit. A general observation is that letter of
credit indirectly reduces the bond interest rate through its through its impact on the selected
variables that have been found to affect interest cost.5

Some examples of municipal bonds in India are the REC Electricity Bonds, NHAI Bonds, etc.
These bonds are issued for long gestation periods to the public for investment of their money
for which the income earned on such specified bonds is exempted from taxation by the tax
authorities. Essentially the interest that is earned on the bonds is exempted from taxation and
shall not form a part of total income under Section 10(15)(iv)(h) of the Income Tax Act, 1961.6
These bonds are generally issued by government backed entities and hence have very low risk
of default. There are some bonds that have tax exemption which is issued by the private sector
such as the Reliance Housing Finance Ltd., Indiabulls Commercial Credit Ltd., etc. These
bonds are highly subscribed by the public as they are backed by companies whose credit
worthiness is very high. But for those bonds which are issued by companies whose credit
worthiness is not up to par, the usage of letter of credit becomes mandatory for them in the

3
Roger D Stover et al., The role of Bank Letter of Credit in Corporate Tax-Exempt Financing, Financial
Management Vol. 16, No. 1 (Spring, 1987).
4
Id.
5
Id.
6
Income Tax Act, 1961, §10.

4
sense that they have to rely on the credit worthiness of the bank that issues the letter of credit
in favor of the bonds which in turn increases the credit worthiness of those bonds.

As stated earlier these bonds are floated and priced on the basis of their credit worthiness of
the issue and such credit worthiness can be determined by the credit enhancer that the bonds
are endorsed by. In such situations the letter of credit which is used to back the bonds improves
the credit rating of such bond because the bond is given the same rating as obligations of the
bank which issues the letter of credit or its holding company.7 One drawback to such an
arrangement is that the bank that is issuing the letter of credit must have a better credit
rating/worthiness than the issuer of the bonds otherwise the letter of credit will not be useful
as a credit enhancer.8

Usually letter of credit is issued by the bank for a period of one to ten years 9, which must be
supplemented by an unconditional obligation by the issuer of the bonds to reimburse the bank
for any payments that is made under the letter of credit.10 This facility of reimbursement is
established under the reimbursement agreement between the bank and the bond issuer.

Under the terms of the letter of credit there is a generally included clause which states that if
the letter of credit has expired before the superannuation of the bond and the issuer fails to
renew the letter of credit, in such cases the issuer has to ensure prepayment of the issue to the
bondholders which is compulsorily required.11 Usually when the issuer is unable to renew or
replace the letter of credit which is expiring or has expired, the bank that issued the letter of
credit usually purchases the bond so as to provide for the pre-payment of the issue to the
bondholders as required.12 As the bank undertakes the earlier stated settlement process, the
issuer of the bond faces an accelerated repayment schedule with the bank.13

7
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
8
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
9
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
10
JOEL A. MINTZ ET AL., FUNDAMENTALS OF MUNICIPAL FINANCE 11 (2010)
11
Id; M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
12
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
13
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).

5
Below is a diagrammatic representation of how the Letter of Credit acts as a Credit Enhancer
to the Issue of bonds by the Issuer which is used for corporate tax-exemption financing:

$
Principal and
BONDHOLDERS TRUSTEE
Interest

$ (Letter of Credit
Proceeds Letter of Credit Bank bears
bankruptcy risks)
Assignment of
LETTER OF
ISSUER
Mortgage/Note/ CREDIT BANK
Loan Agreement
$ Mortgage/Note/
Proceeds Loan Agreement

$
PROJECT OWNER
Reimbursement
Agreement

$
$ Cash Flow
Proceeds

PROJECT

6
 HISTORY AND ROLE OF BANK LETTER OF CREDIT AND ITS
LINKAGE TO THE 2008 FINANCIAL CRISIS

The usage of letter of credit as a credit enhancer rose in the 1980s due to the prevalence of
high-interest rates.14 As there was a prevalence of high interest rates in the 1980s, the bankers
felt a need to formulate a new financial instrument to lower the debt service costs and hence
the letter of credit was being used by the bankers to finance their issues.15 Letter of credit a
form of a credit enhancer grew very popular during the period of 2000 to 2007.16 Essentially
during that time, for the European Banks and the US Banks, the issuing of letter of credit was
a substantial amount of their business as they could leverage their own credit worthiness to
earn a payout in the form of the fees to cover the issue of the bonds and the same was easy
for them to undertake.17

In the 2008 Financial Crisis many banks that used to issue bank letter of credit became heavily
downgraded and as a result of which the credit worthiness of the bank in its totality fell down.18
Additionally, there was an increase in the costs of acquiring a letter of credit due to which this
form of credit enhancement was used very rarely.19 Since the credit worthiness of the letter of
credit was dependent on the credit worthiness of the bank, after the 2008 Financial Crisis banks
were downgraded by the credit rating agencies and hence this led to a downfall in the issuance
of letter of credit by issuing banks.20 Whenever the bank whose letter of credit has been
downgraded by the credit agencies, the following bond issue will also get downgraded which
results in a substantial increase in the borrowing costs which can be translated into interest
expenses for the issuer.21 Hence as the credit worthiness of the letter of credit reduced, the

14
ROBERT A. FIPPINGER, THE SECURITIES LAW OF PUBLIC FINANCE § 2:1, at 2-4 (2d ed. 2009).
15
Id.
16
U.S. SECURITIES AND EXCHANGE COMMISSION, REPORT ON THE MUNICIPAL SECURITIES
MARKET 10 (2012), http://www.sec.gov/news/studies/2012/munireport073112.pdf
17
Carrick Mollenkamp & Michael Corkery, Banks Get Tough with Municipalities, WALL ST. J. (Jan. 27, 2011),
http://online.wsj.com/article/SB10001424052748704062604576106282512683312.html.
18
Id.
19
Id.
20
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135..
21
Michael Connor, MUNIS-Tax-Free Investors Saw Bank Downgrades Coming, CHI. TRIB. (June 22, 2012),
http://articles.chicagotribune.com/2012-06-22/news/sns-rt-markets-municipalsl2e8h m72y-
20120622_1_downgrades-tax-free-debt-municipal-market-data (last visited Sep. 5, 2014); Robert Slavin,
Moody’s Drops Key Banks, Sparking Muni Downgrades, THE BOND BUYER (June 22, 2012),
http://www.bondbuyer.com/issues/121_121/moodys-downgrades-45-billion-munis-related-banks-1041 194-
1.html (last visited Sep. 5, 2014).

7
credit enhancement feature of the issue of letter of credit also reduced drastically and would no
longer be used in the market.22

The number of banks that are providing letter of credit to bond issues are drastically very less
as compared to that of the period prior to the 2008 Financial Crisis and those that are issuing
are also doing so at a high rate.23 Many letter of credit’s which used to supplement the bonds
expired in the year of 2011 as a result of which the banks started using alternative methods of
financing which would lead to substitution of the letter of credit facility such as allowing
borrowers to “replace floating-rate debt with debt that a bank buys and keeps for itself,” also
called a bank-qualified placement or private placement transaction.24 Bank qualified placement
or private placement are “transactions in which a borrower directly places a loan with the
investors or a bank, either with or without a placement agent”.25 Since the 2008, the credit
enhancement transactions have been very few in operation.26 In 2009, the Federal Home Loan
Bank of Atlanta provided letter of credit for tax-exempt municipal bonds which were vital in
stimulating community economic development.27 The Bank provided such letter of credit for
large scale projects on the ground that providing this credit enhancement mechanism will
ensure community economic development.28

22
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
23
Caitlin Devitt, Private Placements Take Off Thanks to Expiring LOCs, THE BOND BUYER, Feb. 13, 2012, at
7A
24
Carrick Mollenkamp & Michael Corkery, Banks Get Tough with Municipalities, WALL ST. J. (Jan. 27, 2011),
http://online.wsj.com/article/SB10001424052748704062604576106282512683312.html.
25
Caitlin Devitt, Private Placements Take Off Thanks to Expiring LOCs, THE BOND BUYER, Feb. 13, 2012, at
7A.
26
Conduit financing with Tax-Exempt Bonds, Justin S Cooper, available at
https://s3.amazonaws.com/cdn.orrick.com/files/Insights/PBF-Green-Book-Conduit-Financing.pdf, last accessed
on 04/11/2019.
27
Federal home Loan Bank of Atlanta press release, https://corp.fhlbatl.com/who-we-are/news/federal-home-
loan-bank-of-atlanta-provides-credit-support-for-tax-exempt-municipal-bonds-to-stimulate-community-
economic-development/
28
Id.

8
 LETTER OF CREDIT VS. BOND INSURANCE POLICY AS CREDIT
ENHANCERS

Whenever an issuer faces a problem of low credit worthiness and wants to increase the said
credit worthiness, he has to choose from various credit enhancers. The two majorly used credit
enhancers are the bank letter of credit and the bond insurance policy. Primarily, bond insurance
policy is a type of insurance policy that a bond issuer purchases that guarantees the repayment
of the principal and all associated interest payments to the bondholders in the event of a default.
The letter of credit differs from the bond insurance policy in the following ways:

1. Finance Charges: Letter of credit has a period finance charge wherein the bond issuer
must pay to the bank that issues such letter of credit such charges from a period time as
set. On the other hand, bond insurance policies premium is usually paid “in full at the
time of issuance of the bonds”.29 As the letter of credit does not have any fixed cost, the
costs of the letter of credit may not be paid off in the beginning from the proceeds
received during the issuance of the bonds.30 Usually from the bond proceeds that are
received at the time of issuance of the bonds, only the upfront costs of the letter of credit
and its costs during the construction period can be paid off. Mostly, the costs of the
letter of credit finance charges vary due to the changes in law or the banking
regulations.31 One of the main drawbacks of the bond insurance policy is that in case
the issuer calls the bonds on their first redemption date or issues an advance refunding
prior to the date, the insurance policy holder cannot recover the unused insurance
premium that was paid up front with the bond issue proceeds but the letter of credit
holder can stop paying the letter of credit finance costs. Hence, there seems to be a
disadvantage for the bond insurance policy holder rather than the letter of credit holder.
In case of letter of credit since the charges payable towards the bank accrue at intervals
and not all at one time, it becomes easier for the letter of credit holder to use the funds
that have been received from the issue of bonds. On the other hand, the moment the
bond insurance policy is paid for at the time when the premium for the bonds is

29
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
30
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
31
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).

9
 received, a part of it is utilized for this aspect and hence there will be lower availability
of funds than that were initially there with the bond issuer.
2. Period Covered: Usually, the letter of credit are termed for a tenure of one to seven
years and do not extend for a period of more than ten years. On the other hand, bond
insurance policies are in force for the entire period of the bond as stated on the date of
the issue.32 The main issue that the issuers who have issued bonds that are backed by
letter of credit have to renew or substitute the letter of credit from time to time or they
will face the possibility of an earlier redemption of the bonds and accelerated payment
schedule if the letter of credit is not renewed or substituted.33

As stated earlier, the use of letter of credit as a credit enhancer and guarantor for the municipal
bonds was popular from 2000 to 2007 and after the 2008 Financial Crisis the demand for letter
of credit has fallen in the United States.34 As per the statistics that has been provided by
Thomson Reuters the demand for letter of credit as a credit enhancer and guarantor was still
rising but in 2009 it faced a significant decline35.

32
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
33
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
34
U.S. SECURITIES AND EXCHANGE COMMISSION, REPORT ON THE MUNICIPAL SECURITIES
MARKET 10 (2012), http://www.sec.gov/news/studies/2012/munireport073112.pdf
35
This data is only limited to the United States of America and Puerto Rico; Roxanna Santiago Ortiz, The use of
letters of credit as credit enhancers for Municipal Bonds and the Commonwealth of Puerto Rico’s case study,
84-Rev-Jur-UPR-135.

10
 TYPES OF LETTER OF CREDIT WHICH ARE USED AS CREDIT
ENHANCEMENTS
The beneficiary of a letter of credit that backs the municipal bond is the trustee.36

To back up municipal bonds there are three types of letter of credits namely:

1. Direct pay Letter of Credits

2. Commercial Letter of Credit
3. Standby Letter of Credit

The bank that issues the letter of credit under the direct pay letter of credit has to pay the amount
directly to the beneficiary each amount which is secured by the letter of credit. Thus, under the
direct pay letter of credit, the bank that draws the letter of credit remunerates the trustee directly
the amount of the semi-annual interest instalment payment and annual instalment of principal.37
Under the direct pay letter of credit, the issuer of the municipal bonds is under a reimbursement
agreement to reimburse the bank which draws the letter of credit immediately of the amount
which has been paid to the bondholders.

Under the Commercial letter of credit as a condition precedent or condition at the time of
issuing the letter of credit, the issuer of the bonds must transfer funds or assets to the bank. In
a commercial letter of credit the issuer of bonds pays to the bank the amount of each payment
or instalment before the draw of payment is made.38 Whereas in a direct pay letter of credit,
the issuer of bonds pays to the bank the amount of each payment or instalment after the draw
of payment is made.39

Under the Standby Letter of Credit unlike the earlier direct pay letter of credit and the
commercial letter of credit, the issuer of the bonds must make the first effort of making payment
of the instalment failing which the bank shall step in and make the payment.40 The bank in this
scenario will only make the payment after the default of the issuer of the bonds.41 In the event
of a default by the issuer, the trustee of the letter of credit makes a draw on the standby letter

36
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
37
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
38
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
39
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).
40
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
41
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011).

11
of credit and accelerates the payment of the bond.42 Therefore, “the amount payable under the
L.O.C. will equal all the unpaid principal” of the bond, the accrued interest to the date of
payment and a premium, if any.43 In India, banks are using the structure under the standby
letter of credit to avert the loan defaults.44 From this it could be understood that letter of credit
is no longer being used as a credit enhancement instrument but is being used as an instrument
of last resort to avert the loan defaults.

A standby letter of credit is drawn only if there is default by the other party to make payment.45
A bank with a strong credit rating might issue a stand by letter of credit to back the direct pay
letter of credit issued by a bank which has lower credit rating. 46 Essentially if the trustee fails
to receive payment from the first bank, then the trustee may approach the second bank to draw
on the standby letter of credit.47 This form of use of the letter of credit ensures that the letter of
credit has the form of a credit enhancer.

42
Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal Bonds and the
Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
43
M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011); Roxanna Santiago Ortiz, The
use of letters of credit as credit enhancers for Municipal Bonds and the Commonwealth of Puerto Rico’s case
study, 84-Rev-Jur-UPR-135..
44
Banks and Companies are using standby letter of credit to avert loan default, downgrade, Sugata Ghosh,
Economic Times, https://economictimes.indiatimes.com/industry/banking/finance/banking/banks-and-
companies-are-using-standby-letter-of-credit-to-avert-loan-default-downgrade/articleshow/30180192.cms
45
Conduit Financing with Tax Exempt bonds, Justin S Cooper,
https://s3.amazonaws.com/cdn.orrick.com/files/Insights/PBF-Green-Book-Conduit-Financing.pdf
46
47

12
 CURRENT SCENARIO OF BONDS ISSUED
After the 2008 Financial Crisis, there was a reduction in the users of letter of credit in the form
of a credit enhancer for the bonds that are issued. As this form of credit enhancement has
become less prevalent, municipal bonds started being issued by companies which are only
AAA certified. The Indian Railways Finance Corporation Tax-Free Bonds was one of the
bonds which was not enhanced anymore by a letter of credit.48 These bonds were issued in
October 2011 and were certified as AAA certified. Also, the interest rate that is guaranteed by
the Indian Railways Finance Corporation Bonds was up to 8% tax-free returns.49

The Rural Electrification Corporation Bonds are also municipal bonds which have a pay out
period of 5 years and carry 6% interest without the need of credit enhancers.

After the 2008 Financial Crisis, as the banks credit worthiness was one which fluctuated from
time to time there was no need for using bank letter of credit as a credit enhancers. As had been
seen in the 2008 Financial Crisis that since Lehmann Brothers, one of the largest global
financial services firm going under, the credit worthiness of the banks can no longer be
estimated as there is no accrual basis on which one can say that the banking system sustains.
Additionally, as the number of Non-performing Assets of Indian banks had been increasing till
the introduction of the Insolvency and Bankruptcy Code in 2016 as an effective measure, it
could be understood that the government was skeptical of its own banking system. The Firestar
Diamond scam proved that the banking system of the country could fall at any time and relying
on the same could not be productive.

In 2019, there has been a rise in the demand for the government bonds as the bonds are
primarily government bonds and additionally are AAA rated which ensures that they are a risk-
free bet for those in the high tax bracket.50 But none of these bonds are backed by credit
enhancers such as bank letter of credit. As has been stated earlier, the lack of belief in the Indian
banking system has come to a stance wherein companies and the government that is issuing
bonds have more credit worthiness than that of the banks due to their long list of outstanding
Non-Performing Assets and hence not completing the task of credit enhancement.

48
Government Bonds and Taxes: Investment options to cut taxes without High Risk, Aishwarya Kannan,
Economic Times https://economictimes.indiatimes.com/tdmc/your-money/government-bonds-taxes-investment-
options-to-cut-taxes-without-high-risk/articleshow/62753734.cms
49
Id.
50
Investors Flocking to tax free government binds, Prashant Mahesh, Economic Times,
https://economictimes.indiatimes.com/markets/bonds/investors-flocking-to-tax-free-government-
bonds/articleshow/71750011.cms

13
 CONCLUSION
As has been stated by the author in the course of the paper, the demand for letter of credit to be
used as credit enhancers is diminishing. This diminishing value of the letter of credit is due to
the insurgency that is prevalent in the banking and finance sector. The fall of Lehmann Brothers
in the 2008 Financial Crisis has triggered such a response to the banking and finance sector
that the letter of credit that is issued by the bank is no longer being used as the major source of
credit enhancement for bond issuers.

The market for bond issuers in India is an emergent market wherein off late there has been a
large investment that the individuals in the upper tax bracket are making in the bonds.51 These
bonds earlier were secured with the letter of credit were for companies and governments whose
rating was lesser than that of the bank issuing the letter of credit. Nowadays, the companies
that are issuing the tax-free bonds and the government that is issuing those tax-free exemption
bonds have better credit worthiness than that of the banks that are issuing the bonds. Hence
there is no need for the company to acquire such bank letter of credits for the purpose of credit
enhancer.

The letter of credit as a credit enhancer can only used in cases wherein the company or
government authority that is raising the bonds issue has lower credit rating or worthiness than
that of the bank that is issuing the letter of credit. The use of standby letter of credit in India in
the manner wherein it is used as a credit enhancer for the already issued letter of credit is not a
practice that is prevalent in India. Suppose a bank that issues a letter of credit that has a low
credit worthiness, then that bank may take another letter of credit on its name to increase the
credit worthiness of the first issued letter of credit. This practice is not prevalent in India and
is only used majorly in the United States of America.

The author in his view makes an observation that the need for bank letter of credit as a credit
enhancer has fallen and is no longer of any use. The companies and government entities that
are issuing the bonds already have a higher credit worthiness than that of the banks due to
which this practice is not of much importance in India. The only way in this practice can be
revamped is through the re-organization of the banking and finance sector which will lead to
the upliftment of the need for using credit enhancers to back up bond issues. Currently, the
institution of letter of credit is being used by the defaulter of loans which is in my view a misuse
of the letter of credit. The letter of credit must be used as a credit enhancer and not as a weapon

51
Id.

14
of last resort by the entities which are financially unstable and becoming unreliable. The whole
banking sector in India is riddled with Non-Performing Assets. Until and unless the
government ensures that these Non-Performing Assets have gotten rid off there is no chance
that the bank letter of credit will be used as a credit enhancer.

15
 BIBLIOGRAPHY
Newspaper Articles

1. Investors Flocking to tax free government binds, Prashant Mahesh, Economic Times,
https://economictimes.indiatimes.com/markets/bonds/investors-flocking-to-tax-free-
government-bonds/articleshow/71750011.cms
2. Government Bonds and Taxes: Investment options to cut taxes without High Risk,
Aishwarya Kannan, Economic Times
https://economictimes.indiatimes.com/tdmc/your-money/government-bonds-taxes-
investment-options-to-cut-taxes-without-high-risk/articleshow/62753734.cms
3. Banks and Companies are using standby letter of credit to avert loan default,
downgrade, Sugata Ghosh, Economic Times,
https://economictimes.indiatimes.com/industry/banking/finance/banking/banks-and-
companies-are-using-standby-letter-of-credit-to-avert-loan-default-
downgrade/articleshow/30180192.cms
4. Caitlin Devitt, Private Placements Take Off Thanks to Expiring LOCs, THE BOND
BUYER, Feb. 13, 2012, at 7A.
5. Robert Slavin, Moody’s Drops Key Banks, Sparking Muni Downgrades, THE BOND
BUYER (June 22, 2012), http://www.bondbuyer.com/issues/121_121/moodys-
downgrades-45-billion-munis-related-banks-1041 194-1.html (last visited Sep. 5,
2014).
6. Michael Connor, MUNIS-Tax-Free Investors Saw Bank Downgrades Coming, CHI.
TRIB. (June 22, 2012), http://articles.chicagotribune.com/2012-06-22/news/sns-rt-
markets-municipalsl2e8h m72y-20120622_1_downgrades-tax-free-debt-municipal-
market-data (last visited Sep. 5, 2014)

Scholarly Articles
1. Roxanna Santiago Ortiz, The use of letters of credit as credit enhancers for Municipal
Bonds and the Commonwealth of Puerto Rico’s case study, 84-Rev-Jur-UPR-135.
2. Conduit financing with Tax-Exempt Bonds, Justin S Cooper, available at
https://s3.amazonaws.com/cdn.orrick.com/files/Insights/PBF-Green-Book-Conduit-
Financing.pdf, last accessed on 04/11/2019.
3. Carrick Mollenkamp & Michael Corkery, Banks Get Tough with Municipalities,
WALL ST. J. (Jan. 27, 2011),

16
 http://online.wsj.com/article/SB10001424052748704062604576106282512683312.ht
ml.
4. Roger D Stover et al., The role of Bank Letter of Credit in Corporate Tax-Exempt
Financing, Financial Management Vol. 16, No. 1 (Spring, 1987).
Treatises
1. M David Gelfand, STATE AND LOCAL GOVERNMENT DEBT FINANCING, (2011)
2. ROBERT A. FIPPINGER, THE SECURITIES LAW OF PUBLIC FINANCE § 2:1, at
2-4 (2d ed. 2009).
3. JOEL A. MINTZ ET AL., FUNDAMENTALS OF MUNICIPAL FINANCE 11 (2010)

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