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HomeMy WebLinkAboutFIN 100 Letter of Credit Acceptance Policy Policy Procedure Title: Letter of Credit Acceptance Policy Policy Number FIN 100 Reference Resolution #574/24 Date Originated (m/d/y) September 23, 2024 Date Revised (m/d/y) Pages 5 Approval: Chief Administrative Officer Point of Contact Director, Finance & Treasurer Policy Objective To establish a policy for the acceptance and administration of Letters of Credit as a security from financial institutions. Index 01 Definitions 02 Scope 03 Requirements for a Letter of Credit 04 Acceptable Institutions 05 Acceptable Alternatives to a Letter of Credit 06 Administration of Letters of Credit 07 Draw, Reduction or Release of a Letter of Credit 01 Definitions 01.01 Automatic Renewal – A condition that states the Letter of Credit shall be automatically extended without formal amendment for a specified period of time beyond the stated expiry date. Written notification must be received by the City prior to the expiration, if automatic renewal is to be terminated. 01.02 City – The Corporation of the City of Pickering. 01.03 Development Agreement – refers to any agreement entered into between the City of Pickering and a landowner to regulate the provision of on-site and municipal works required to service land under development applications, and includes, but is not limited to Site Plan, Plan of Subdivision/Condominium, Master Development Agreement, Construction Agreement and Servicing Agreement. Policy Title: Letter of Credit Policy Page 2 of 5 Policy Number: FIN 100 01.04 Irrevocable Letter of Credit – a Letter of Credit cannot be revoked or amended without the agreement of both the City and the issuing financial institution. 01.05 Letter of Credit – a document issued by a financial institution on behalf of their client to guarantee payment to the City. This security can be drawn against, should the client fail to meet their obligations under an agreement. 01.06 Schedule I Banks – domestic banks authorized under Schedule I of the Bank Act to accept deposits. 01.07 Schedule II Banks – foreign bank subsidiaries authorized under Schedule II of the Bank Act to accept deposits. Foreign bank subsidiaries are controlled by eligible foreign institutions. 01.08 Schedule III Banks – foreign bank branches of foreign institutions that have been authorized under Schedule III of the Bank Act to do banking business in Canada. Schedule III banks are not incorporated with the Bank Act and operate under restrictions not required by Schedule I or II banks. 01.09 Surety Bond – a bond which guarantees the assumption of responsibility for payment of security in the event of default of a Development Agreement. 02 Scope 02.01 The City accepts Letters of Credit to be submitted as security for Performance and Maintenance obligations under Development Agreements. The issuing banks of Letters of Credit accepted by the City must meet specific credit-rating requirements, and the Letters of Credit must be written in a specific form. 02.02 Acceptance of a Letter of Credit as a security is advantageous to the City since full or partial draws can be made upon the Letter of Credit on demand, regardless of disputes which may occur; no service charges are assessed to the City; and the Letter of Credit can be written so that it automatically extends from year to year. 02.03 Letters of Credit may be required for other types of agreements at the discretion of the Director, Finance & Treasurer. 03 Requirements for a Letter of Credit 03.01 Letters of Credit from any institution, including trust companies and credit unions, are not accepted unless approval is first received from the Director, Finance & Treasurer. In all circumstances, the acceptance or rejection of any Letter of Credit is at the sole discretion of the Director, Finance & Treasurer. 03.02 Institutions issuing Letters of Credit accepted by the City for any reason must meet specific credit-rating requirements, and the Letter of Credit must be written Policy Title: Letter of Credit Policy Page 3 of 5 Policy Number: FIN 100 in the City’s standard format (see Appendix 1). Acceptance of only certain types of Letters of Credit ensures that the interests of the City are protected. 03.03 Letters of Credit accepted by the City must: a) be printed on letterhead from the issuing financial institution; b) be the original copy (electronic copies will not be accepted); c) be issued in Canadian dollars in the amount requested by the City; d) specify that the Letter of Credit is irrevocable; e) be registered in the name of The Corporation of the City of Pickering; f) for the financial institution issuing office for the Letter of Credit be located in Ontario; g) disclose the project file number and municipal address or legal description; h) include an automatic renewal clause, requiring the bank to provide thirty days advance notice to the Treasurer, by registered mail, if it does not intend to renew; and, i) conform to the intent of the City’s standard format (see Appendix 1). Any deviation from the standard format will be subject to review by the City and may be refused for non-compliance. 03.04 Any deviations from the City’s Letter of Credit “template” shall be reviewed by the Finance Department and Legal Services Section and are subject to the final approval of the Director, Finance & Treasurer. 04 Acceptable Institutions 04.01 Letters of Credit may be accepted from any of the following six largest banks set out in Schedule 1 of the Bank Act (R.S.C.1985, C.B-1.01, and any amendments thereto): • Bank of Montreal • Bank of Nova Scotia • Canadian Imperial Bank of Commerce • National Bank of Canada • Royal Bank of Canada • Toronto Dominion Bank 04.02 Letters of Credit may be accepted from other Schedule I banks and Schedule II banks listed in the Bank Act (R.S.C. 1985, C.B-1.01 and any amendments thereto), having a Morningstar DBRS rating of R-1(Mid) or better, or an Policy Title: Letter of Credit Policy Page 4 of 5 Policy Number: FIN 100 equivalent rating by the rating agencies Moodys or S&P Global, subject to the approval of the Director, Finance & Treasurer. 04.03 If the City accepts a Letter of Credit from other Schedule I or Schedule II banks, the bank must maintain the minimum credit rating throughout the period of time the Letter of Credit is held by the City. The Finance Department will monitor the credit ratings of banks for those Letters of Credit held by the City. 04.04 If the bank’s credit rating fall below the minimum level, the City will require a substitute Letter of Credit from an eligible bank. Upon the direction of the Finance Department, the City department will contact the developer or landowner to advise them that a substitute Letter of Credit from an eligible bank is required. 04.05 The substitute Letter of Credit must be presented to the City within 30 calendar days of the City’s request. Should the Letter of Credit not be replaced within the time frame specified by the City, the City may at their discretion draw down the existing Letter of Credit. 04.06 Letters of Credit from any other institutions, including trust companies, credit unions and Scheule III banks, will not be accepted. 05 Acceptable Alternatives to a Letter of Credit 05.01 Acceptable alternatives to a Letter of Credit are cash, certified cheque, bank draft, and money order. 05.02 If any of the above is provided in lieu of a Letter of Credit, the funds must be forwarded to the Finance Department for deposit to the City’s bank account. 05.03 Releases or draws on these funds will be processed in the same manner as a Letter of Credit. No interest will be paid when funds are released. 05.04 Surety Bonds issued by insurance companies are acceptable security alternatives subject to the requirements in the Surety Bond Acceptance Policy. 05.05 The City will not accept Letters of Guarantee, Term Deposits, GIC’s or any form of non-cash security (with exception of Surety Bonds) as an alternative to a Letter of Credit. 06 Administration of Letters of Credit 06.01 Originating Departments are responsible for the following: a) providing the City’s Letter of Credit “template” (see Appendix 1) to developers, landowners, etc. for them to comply with; Policy Title: Letter of Credit Policy Page 5 of 5 Policy Number: FIN 100 b) ensuring that the form, content and wording of Letters of Credit received from developers, landowners, etc. match the City’s Letters of Credit “template”; and, c) forwarding the Letters of Credit to the Finance Department for evaluation and safekeeping. 06.02 The Finance Department is responsible for the following: a) confirming the acceptance of Letters of Credit by email to the originating department; b) that Letters of Credit (or acceptable alternatives) submitted, meet the requirements of this Policy; c) the safekeeping of the Letters of Credit; and, d) all draws, reductions, or releases of Letters of Credit. 07 Draw, Reduction, or Release of a Letter of Credit 07.01 A request in writing to draw, reduce, or release the Letter of Credit, duly signed by an authorized employee (from the originating Department) is forwarded to the Finance Department for the Division Head, Finance’s authorization. 07.02 A letter of request to draw, reduce or release a Letter of Credit is prepared and signed by the Division Head, Finance or designate and distributed as follows: • financial institution (original) • requester in originating department • individual/developer who submitted Letter of Credit. Appendices Appendix 1 Letter of Credit Template