Tasman Crest Foods

Read the request before the numbers, and read it as what it changes, not what it saves. A letter of credit is not a fee line on the client's trade cost schedule — it is the answer to the oldest question in lending: who owes you the money? Under the LC, the answer is a bank, whose undertaking is documentary, independent of the buyer's solvency, and enforceable in a system built for exactly that purpose. Under open account, the answer is a mid-sized Singapore distribution company, whose promise is as good as its balance sheet in the month the invoice falls due. The migration being requested does not make the trade cheaper. It swaps the debtor — from a bank to a company — and pays the client US$0.13m a year for agreeing to hold the weaker promise.

Now open the file, because the file decides how much that swap matters. The growth is real — +18% over two years, priced properly, no margin give-away. The conduct is clean on both sides of the relationship: nine years, and not one discrepant document in four. But the concentration line turns the request from routine to structural: this single buyer is 35% of revenue, roughly US$10.2m of annual flow, and every dollar of it currently arrives inside ten days of a compliant presentation. Migrate that flow to open account at 60 days — closer to 74 in practice, end-of-month terms being what they are — and two things happen at once: the company's largest exposure changes species, from bank-secured to unsecured trade credit, and roughly US$1.8m of additional working capital gets absorbed into the receivables ledger. That is what the US$2.0m increase is actually for. The MD is not asking the bank to fund growth. He is asking it to fund the credit he is about to extend to his own biggest customer.

The committee's instinct — and the most common reader answer — is C: refuse, because the letter of credit is the bank's security and surrendering it is a one-way concession. The instinct reads the risk correctly and the market wrongly. The buyer has already moved two competing suppliers onto open account; documentary terms are becoming, in this corridor and this category, a price of not mattering. A bank that forces its client to defend an instrument the client's market has stopped accepting is not protecting the client — it is protecting its own collateral schedule, at the client's commercial expense, and it should expect the relationship to be repriced accordingly. Refusal treats the LC as the point. The LC was never the point. It was the mechanism by which the buyer's credit was somebody else's problem.

The senior banker's read is B, and the move is a change of underwriting subject, not a change of generosity. Agree to the migration — and underwrite the buyer it exposes. A buyer sub-limit, set off a real file on the Singapore distributor, not off nine years of warm history with its supplier. Trade credit insurance over the open-account book at the conventional 90% cover, with the premium priced into the facility honestly — the client will discover that the banks were never where most of the cost lived. The facility itself rebuilt as a receivables base in which insured open-account paper is eligible and uninsured paper is not, so the structure — not a covenant, not a conversation — decides how far the new terms can run. And the letters of credit stay exactly where they still belong: new buyers, new markets, anywhere the file is thinner than nine years. Run the arithmetic and the request even survives at almost full size — US$1.8m of genuine new absorption against US$2.0m asked. The number was never the problem. The debtor was.

There is one more thing the structure does, and it is the quiet reason B beats a flat refusal. The insurance underwriter will now look at the Singapore buyer every year, with better data than the bank will ever hold, and reprice or withdraw cover as that buyer's condition moves. The bank has not just protected an exposure — it has bought an early-warning system pointed at the one company that can hurt its client most. When a buyer this large asks its suppliers to stand closer, the answer is not to refuse the step. It is to check the ground it is asking you both to stand on, and to keep checking it, every year, on someone else's instruments. The letter of credit was never the fee line. It was the debtor. Drop it and you haven't saved a cost — you've changed whose promise you're holding.