To: All Presidents of National Banks, Regional Administrators, and
Examining Personnel

Subject: Exception to Lending Limits for OPIC Insured Standby Letters of
Credit Issued by National Banks

There is attached for your information a copy of our letter dated
September 24, 1976 to Mr. Hilliard A. Zola, Vice President for
Insurance, Overseas Private Investment Corporation, and other related
correspondence, regarding the conditions under which OPIC insured
standby letters of credit are exempted from the legal lending limit
pursuant to Interpretive Ruling 7.1160 (c)(3) \[12 CFR 7.1160 (c)(3)\].

Robert Bloom

Acting Comptroller of the Currency

Attachment

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| ## Comptroller of the Currency                                        |
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| > Administrator of National Banks                                     |
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Washington, DC 20219

September 24, 1976

Mr. Hilliard Zola

Vice President for Insurance

Overseas Private Investment Corp.

1129 20th Street, N.W.

Washington, D.C. 20527

Dear Mr. Zola:

This is in response to your inquiries and those of your staff concerning
the Overseas Private Investment Corporation (OPIC) proposal to provide,
under certain carefully structured circumstances, political risk
insurance for standby letters of credit issued by American banks on
behalf of United States construction firms doing business in the Middle
East. You have inquired whether the structure of the OPIC proposal would
exempt National bank standby letters from the lending limit restrictions
normally applicable pursuant to 12 U.S.C. 84 and 12 C.F.R. 7.1160.

I. Background

The huge increase in oil revenues of certain Middle Eastern countries
since 1973 has enabled them to commence large internal development
programs, including new roads, hospitals, factories, and other
components of a modern industrial infrastructure. U. S. construction
firms and suppliers have entered the new markets along with their
European and Japanese competitors. These contractors are frequently
required by the host country to post bid, performance, and advance
payment guarantees for each venture or project. The guarantees are a
form of insurance for the host country and are similar, in a contractual
sense, to \"liquidated\" damages. Traditionally, Middle East countries
have required that such guarantees be issued in the form of bank standby
letters of credit or similar instruments. The countries have usually
declined to accept surety bonds in lieu of such bank guarantees.
Typically, the bank letters of credit vary in amount from 2 percent to
20 percent of the gross contract, provide for guarantee of performance
by the contractor, and are treated as loans by the issuing bank.

On July 7, 1976, OPIC announced a proposal to offer political risk
insurance for the standby letters of credit in order to \"strengthen the
position of U. S. contractors in competitive bidding for construction
contracts abroad.\" Under the OPIC proposal, OPIC would insure 90
percent of the letter of credit against arbitrary drawing, thereby
removing \"the political risk inherent in these transactions
and\....permit\[ing\] more U. S. firms to participate in the development
of the Middle East. The OPIC announcement also explained that, as a
result of OPIC\'s action, \"a number of surety companies have agreed to
provide on-demand bonds to collaterize the commercial risk under the
letters of credit, thus minimizing the issuing banks\' risk and
facilitating the issuance of the letters of credit.\" The July 7
announcement continued:

> \[T\]hese additional services will place U. S. contractors on a more
> competitive footing with construction firms from other nations which
> provide a wide variety of incentives for their construction
> industries, often at concessional terms. Because the U. S. industry
> had no comparable service available, the U. S. has lost considerable
> economic advantage; but with this significant reduction of risk,
> contractors will be able to compete more effectively. With increased
> U. S. participation in overseas construction projects, the U. S. will
> benefit from increased exports, the creation of additional U. S. jobs,
> and will realize other positive contributions to this country\'s
> economy.

II\. Statutes and Regulations Involved

The letter of credit obligations which national banks may issue under
the OPIC proposal are presently curtailed by statute and regulation. 12
U.S.C. 84 generally limits (with exceptions not here pertinent) the
total obligations which any \"person, co-partner, association, or
corporation\" may have to a national bank to 10 percent of the bank\'s
capital and unimpaired surplus. Standby letters of credit are treated as
loans subject to this legal lending limit and must, therefore, be
combined with any other nonexcepted loans to the account party by the
issuing bank when applying 12 U.S.C.84. See generally 12 C.F.R. 7.1160.
Pursuant to 12 C.F.R. 7.1160(b), however, the lending limit restriction
will not be applicable where the \"Comptroller of the Currency has found
that a particular standby letter of credit or a class of standby letters
of credit will not expose the issuer to the similar risk of loss as
would a loan to the account party.\" The applicability of this exception
in the circumstances of the OPIC proposal, therefore, depends upon an
assessment of the risk to the national bank participant.

III\. Details of OPIC Plan

Under the OPIC guarantee/surety proposal, standby letters of credit
issued for the account of a U. S. contractor by a bank and payable to
the country-beneficiary would be insured against both political and
commercial risk. OPIC would cover 90 percent of the political risk while
the private surety company would cover 100 percent of the commercial
risk. The plan would work as follows:

Bank \"A\" would issue a standby letter of credit for the account of a
contractor (\"B\") and to beneficiary (\"C\") (the government of Saudi
Arabia, or another country). If \"B\" should default on its contract (a
particular construction or a supply contract) \"C\" could demand that
\"A\" meet its commitment under the letter of credit. After the bank
honors the letter of credit, it would be entitled to reimbursement from
the surety, or OPIC, depending upon whether default was caused by the
contractor\'s nonperformance (commercial risk) or was based on political
factors such as expropriation, arbitrary national action, war,
insurrection, etc.

The question of whether default was political or commercial would be
submitted to an impartial arbitrator for decision. OPIC has initially
estimated that the determination of default could take up to two years.
During the period of the arbitrator\'s deliberation, the bank would be
expected to extend \"bridge financing\" to the contractor. The
contractor would be required to pay interest on this loan.

If the arbitrator has not made a decision as to liability within one
year, OPIC would intervene and make a \"good faith\" determination as to
who is liable. If OPIC decided that default was based on political
factors, it would reimburse the bank for 90 percent of the letter of
credit. If OPIC determined that the default was caused by the
nonperformance of the contractor, it would instruct the surety to pay.
In such a situation the surety would be required to reimburse the bank
for 100 percent of the letter of credit.

The arbitrator\'s final decision may be contrary to OPIC\'s \"good
faith\" determination. Under such circumstances, if the arbitrator
determined that political risk is the reason for default and OPIC had
previously decided that the contractor\'s nonperformance was the cause,
the bank would be required to reimburse the surety 100 percent of the
original payment. If the situation were reverse the bank would be
entitled to full reimbursement from the surety.

The only surety companies eligible for participation in the OPIC plan
are those selected from a Treasury Department list of firms carefully
screened for their underwriting capability. Treasury Circular 570. This
list is public information which is disclosed on a semi-annual basis in
the Federal Register. The current list is found at 41 Federal Register
No. 132 (July 8, 1976).

> IV\. Conditional Availability of Exception to Lending Limits Pursuant
> to 12 C.F.R. 7.1160 (c) (3).

Based upon the information outlined above and additional information
furnished during discussions among our respective staffs, I have
concluded pursuant to 12 C.F.R. 7.1160(c)(3) that standby letters of
credit issued by national bank participants in the OPIC Plan will not be
subject to the lending limit restrictions of 12 U.S.C. ss84 provided
that the following conditions are met:

1\. Bridge loan financing by a participant national bank may not exceed
12 months.

2\. The account party must agree that in the event of a drawing under a
standby letter of credit, i.e., the creation of a \"bridge loan,\" the
account party will reduce its non-excepted obligations to the financing
bank to the extent necessary to permit funding of the bridge loan within
the bank\'s legal lending limit.

The granting of this exemption is based on our considered judgment that
the OPIC Plan gives bank standby letters of credit issued under it
certain unique aspects which make it clear that such letters will not
expose the issuer to the same risk of loss as a loan. Particularly
significant in that regard are the guarantee by a United States
Government agency and the backing of surety companies specifically
approved by the United States Treasury Department. Notwithstanding the
impact of these government and private guarantees upon the risk factor,
however, we have concluded that the additional conditions stated above
are necessary in order to insure that all national banks as well as
contractor-account parties who may participate in a number of these
OPIC-guaranteed arrangements remain fully conscious of the lending limit
problem which could be created if a bank were called upon to fund
several standby letters of credit simultaneously. In effect, we shall
expect national banks and participating contractors alike to provide
adequate in-house margins to insure that such circumstances do not
occur.

I trust that this has been responsive to your inquiries. If you have
further questions, please feel free to discuss them with my staff.

Very truly yours,

Robert Bloom

Acting Comptroller of the Currency

OVERSEAS PRIVATE INVESTMENT CORPORATION

**\[OPIC Logo**

**not available electronically\]**

September 29, 1976

Mr. Robert Bloom

Acting Comptroller of the Currency

490 L\'Enfant Plaza East, SW

Washington, DC 20219

Dear Mr. Bloom:

Thank you very much for your prompt cooperation and that of your staff
in replying to OPIC\'s inquiry concerning its plan to offer political
risk insurance for standby letters of credit issued by American banks on
behalf of United States construction firms doing business abroad.

Your letter of September 24, 1976, describes the circumstances under
which such letters of credit, backed by OPIC insurance as to political
risk and a commercial surety\'s bond as to the contractor\'s
nonperformance, will, pursuant to 12 CFR 7.1160 (b), not be treated as
loans to the contractor that are subject to the legal lending limit.

Because OPIC will want to show your letter to United States banks that
may issue such letters of credit on behalf of contractors, we thought it
might be desirable to clarify our mutual understanding concerning the
details of OPIC\'s plan, as described on page 3 of your letter.
Accordingly, OPIC would greatly appreciate your confirmation that your
advice was predicated on your understanding of the following details:

> 1\. OPIC\'s insurance would cover 90% of the amount of any drawing of
> the letter of credit that was not based on the contractor\'s
> non-performance of its obligations under the construction contract, i.
> e., that was due to \"political risk\". The surety\'s bond would cover
> 100% of any drawing based on the contractor\'s non-performance,
> including insolvency.
>
> 2\. If there should be a question as to whether a drawing of the
> letter of credit was based on non-performance or was a \"political
> risk\" covered by the OPIC insurance, the resolution would be based on
> the dispute-resolving mechanism specified in the underlying
> construction contract or in the letter of credit, if the letter
> contained such a provision.
>
> 3\. If, due to a delay in the dispute-resolving mechanism, OPIC had to
> make an interim \"good faith\" determination as to whether a drawing
> was \"political\" or due to contractor\'s non-performance, OPIC would
> make such determination based on its knowledge and understanding of
> the circumstances and would not become a party to, or participate in
> any way in, the adjudicatory proceeding required by the contractual
> dispute-resolving mechanism. OPIC (as to 90%) and the contractor (as
> to 10%) or the surety (as to 100%) would reimburse the bank in
> accordance with OPIC\'s determination. Of course, if the subsequent
> decision under the dispute-resolving mechanism should be inconsistent
> with that determination, OPIC, the contractor and the surety would
> adjust matters so that the ultimate payment burden was consistent with
> the adjudicatory decision.

Thank you again for your helpful and prompt response.

Sincerely yours,

Hilliard A. Zola

Vice President for Insurance

cc: Mr. John Shockey

Deputy General Counsel

Office of the Comptroller of the Currency

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| ## Comptroller of the Currency                                        |
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| > Administrator of National Banks                                     |
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Washington, DC 20219

October 4, 1976

Mr. Hilliard A. Zola

Vice President for Insurance

Overseas Private Investment Corp.

1129 - 20th Street, N.W.

Washington, D.C. 20527

Dear Mr. Zola:

This is to acknowledge your letter dated September 29, 1976, to Mr.
Robert Bloom, Acting Comptroller of the Currency. Your letter
acknowledges receipt of a ruling dated September 24, 1976, copy
enclosed, by the Comptroller of the Currency granting, pursuant to 12
C.F.R. 7.1160(c) (3) an exception to the lending limits for certain
types of standby letters of credit issued by American banks on behalf of
United States construction firms doing business abroad.

Your letter sets forth your understanding of certain details of the
Comptroller\'s description of the approved arrangements. Specifically,
you ask that we confirm that the ruling was predicted[, inter
alia]{.underline}, on our understanding of the following details:

1\. OPIC\'s insurance would cover 90% of the amount of any drawing of
the letter of credit that was not based on the contractor\'s
non-performance of its obligations under the construction contract,
i.e., that was due to \"political risk.\" The surety\'s bond would cover
100% of any drawing based on the contractor\'s non-performance,
including insolvency.

2\. If there should be a question as to whether a drawing of the letter
of credit was based on non-performance or was a \"political risk\"
covered by the OPIC insurance, the resolution would be based on the
dispute-resolving mechanism specified in the underlying construction
contract or in the letter of credit, if the letter contained such a
provision.

3\. If, due to delay in the dispute-resolving mechanism, OPIC had to
make an interim \"good faith\" determination as to whether a drawing was
\"political\" or due to the contractor\'s nonperformance, OPIC would
make such determination based on its knowledge and understanding of the
circumstances and would not become a party to, or participate in any way
in, the adjudicatory proceeding required by the contractual
dispute-resolving mechanism. OPIC (as to 90%) and the contractor (as to
10%) or the surety (as to 100%) would reimburse the bank in accordance
with OPIC\'s determination. Of course, if the subsequent decision under
the dispute-resolving mechanism should be inconsistent with that
determination, OPIC, the contractor and the surety would adjust matters
so that the ultimate payment burden was consistent with the adjudicatory
decision.

The above description of certain details of the approved arrangement is
in accord with our understanding and is fully within the ambit of the
approval stated in the Acting Comptroller\'s letter of September 24.

Sincerely,

John E. Shockey

Acting Chief Counsel

Enclosure