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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Back-to-back letter of credit

What is a back-to-back letter of credit, and why are banks wary of issuing one?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A back-to-back letter of credit is a second credit that an intermediary's bank issues in favour of the intermediary's supplier, on the strength of a first, master credit that the end buyer's bank issued in favour of the intermediary. The two are separate undertakings: the intermediary's bank must pay the supplier on complying documents even if the intermediary cannot then present matching documents under the master credit and so goes unpaid. Banks therefore treat it as a credit exposure to the intermediary, usually require the two credits' terms to mirror each other closely, and many prefer a transferable credit where the buyer will agree.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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