Back-to-back letters of credit

A new letter of credit opened in favor of another beneficiary on the basis of an already existing, non-transferable, letter of credit. For example, an American merchant agrees to buy cotton from Brazil for sale to a Chinese pants manufacturer. The Chinese manufacturer opens a non-transferable letter of credit for payment to the American merchant who then uses the strength of the letter of credit as a security with his bank for the opening of a new letter of credit to finalize payment to the Brazilian cotton supplier.

The beneficiary of one L/C (prime or ‘master’ letter of credit) offers this as security for the issue of a further L/C (second or ‘slave’ letter of credit) in favor of the supplier of the goods.

The bank issuing the second L/C (usually Advising bank to the prime L/C) is called the second Issuing bank.