Standby Letters of Credit

WHAT IS A STANDBY LETTER OF CREDIT?

A Standby Letter of Credit can be a cost-effective and convenient way to provide financial protection to third parties by a bank's undertaking to pay your obligations to them pursuant to the terms thereof.¹ Standby Letters of Credit are made available through the Loan Management Account^® (LMA^® account), a securities-based loan account based on the value of your assets pledged as collateral.

WHEN CAN A STANDBY LETTER OF CREDIT BE USEFUL?

• Standby Letters of Credit can be used to:
• —   Secure a real estate transaction
• —   Support a lease agreement or credit enhancement
• —   Substitute for a performance bond
• —   Expedite trade, both domestically and internationally, subject to approvals.

WHAT ARE THE BENEFITS OF REQUESTING A STANDBY LETTER OF CREDIT PURSUANT TO THE LMA ACCOUNT?

With a Standby Letter of Credit, you can:

• Support the payment of financial obligations or contractual agreements.
• Maintain capital for other personal or business needs.
• Ease the establishment of new business relationships.
• Continue to trade the eligible securities that you pledged for your Standby Letter of Credit (subject to certain restrictions), helping you maintain your investment strategy.

HOW DOES A STANDBY LETTER OF CREDIT WORK?

• Bank of America, N.A. (Bank) can issue a Standby Letter of Credit on your behalf to support your obligations under the terms of a contract between you and a third party ("the beneficiary"). Note: Issuance is subject to credit and legal approval, and each Standby Letter of Credit must be for at least $200,000.
• If an obligation stated in the Standby Letter of Credit has not been met, Bank will pay the beneficiary upon the presentation of a complying demand for payment.
• You will then have the opportunity to pay cash, liquidate the pledged assets, or activate your revolving line of credit through the LMA account to satisfy the obligation. If a loan is advanced by Bank to satisfy the obligation, you will be charged interest in accordance with the LMA loan agreement.
• Once a Loan Management Account is opened and activated, you may request the issuance of a Standby Letter of Credit in accordance with the terms of the LMA loan agreement. A Standby Letter of Credit can generally be issued within two to three business days of the receipt of complete information and required documentation.
• Please see IMPORTANT CONSIDERATIONS below. Contact your Financial Advisor for more information on fees.

AN EXAMPLE OF WHEN TO USE A STANDBY LETTER OF CREDIT

John owns XYZ Corporation, which manufactures and sells blenders in the United States. The corporation just expanded and needs to move into a larger warehouse for its manufacturing needs. John has found a new location to meet its needs and negotiated a lease with the landlord/owner of the property, but the landlord/owner of the property wants a guarantee that XYZ Corporation will be able to meet its monthly rent payments and also complete some renovation work. The landlord/owner requests a Standby Letter of Credit issued on behalf of XYZ Corporation, which the landlord/owner can draw upon if XYZ Corporation defaults upon the terms of the lease agreement.

Note: This case study is intended to illustrate brokerage products and loan services available at Merrill Lynch. It does not necessarily represent the experience of other clients, nor does it indicate future performance. Investment results may vary. The investment strategies presented are not necessarily appropriate for every investor. Individual clients should review with their Financial Advisors the terms and conditions and risks involved with specific products or services.

IMPORTANT CONSIDERATIONS ASSOCIATED WITH THE LMA ACCOUNT

The Loan Management Account^® (LMA^® account) is provided by Bank of America, N.A., Member FDIC, Equal Opportunity Lender. The LMA account requires a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum credit facility size of $100,000. All securities and the issuance of Standby Letters of Credit are subject to credit approval. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations, and investment time horizon. A complete description of the loan terms can be found within the LMA agreement. Clients should consult with their own independent tax advisor. Some restrictions may apply to purpose loans, and not all managed accounts are eligible as collateral. All applications for LMA accounts are subject to approval by Bank of America, N.A. For fixed rate and term advances, principal payments made prior to the due date will be subject to a breakage fee.

Risks to consider include:

• A decrease in the market value of pledged securities may require you to deposit additional funds to meet a maintenance call. A collateral call could disrupt your investment strategy.
• Your assets may be sold to meet a collateral call, the firm can sell those assets without notifying you, and you are not entitled to choose which securities in the account will be sold.
• You are not entitled to an extension of time to meet a collateral call.
• If any or all of the pledged assets are sold at prices higher than the initial purchase cost, you may suffer adverse tax consequences. You should discuss with your independent tax advisor the tax implications of pledging assets as loan collateral.
• The Bank may demand full of partial repayment of the LMA account at any time.
• The LMA account is fully recourse to you, and you will remain responsible for any deficits on the LMA account.
• Early repayment of any fixed rate or term advance, whether voluntarily or involuntarily due to demand or liquidation by the Bank, may results in substantial breakage fees.

Carefully choosing the quality of your investments can help reduce the likelihood of a collateral call. Other risk management strategies you should consider include:

• Borrowing less than the maximum allowable against your securities.
• Borrowing against a portfolio of less volatile securities, such as Treasury securities, high-grade corporate bonds or blue-chip stocks.
• Diversifying your portfolio through an asset allocation strategy that minimizes exposure to losses in one sector of the economy.
• Monitoring your portfolio carefully, especially in periods of volatility, so that you can take appropriate steps to avoid a maintenance call.