Using Letters of Credit

Members value public unit deposit business, but the required pledging of collateral can be onerous and costly. FHLBank Boston LOCs offer an efficient and flexible alternative that provides your customers with the security they need by leveraging FHLBank Boston’s strong credit position.

The LOC (issued on behalf of the member) guarantees that FHLBank Boston will pay the public-unit depositor (the beneficiary) upon demand, should a member default on the deposit. This efficient, low-cost option allows members to retain securities for liquidity and other purposes. It also allows the public unit immediate access to its funds without having to liquidate securities that are normally pledged to them.

Common types of LOCs used for Public Unit Deposits include:

• Fixed balance
• Variable balance
• Master variable
• Refundable 

Any letter of credit from the FHLBank Boston offers members a well-established means of guaranteeing contracts and obligations on behalf of themselves and their customers. By leveraging the strong credit rating of FHLBank Boston, a Standby LOC may specifically assist with guaranteeing contractual performance. Please note that the beneficiary of a non-Confirming Standby LOC must be a customer, vendor, or financial counterparty of the member or housing associate on behalf of whom the LOC is issued.

Construction companies and developers often partner with state housing and development agencies to issue tax-exempt or taxable bonds that fund public initiatives ranging from housing developments to community development projects. When your borrower is involved in this type of initiative, you may be asked to issue an LOC to pay principal and interest payments to the bondholders or "guarantee" your loan customer’s obligation to make principal and interest payments.

The bondholders will require that your institution have a certain rating level, but your institution may not be able to meet that standard. In such instances, the bondholders may still accept an LOC from your institution if it is "wrapped" by a highly rated bank like FHLBank Boston.

Common types of LOCs used to provide credit support for bonds include the Standby LOC.

To determine whether a bond transaction would qualify for a "wrap" from FHLBank Boston, please contact your relationship manager.