An irrevocable standby letter of credit is a letter from a bank that guarantees that the bank will step in on behalf of the buyer to pay the debt in the event of default. In the case of grants under the Broadband Equity, Access and Deployment (BEAD) program, the applicant is the subgrantee and the beneficiary is the state that is awarding the grant.
The standby letter of credit is required by the National Telecommunications and Information Administration to ensure that subgrantees have the financial resources to complete their broadband projects. The letter of credit must account for 25 percent of the grant award, and it must be irrevocable, which means that it cannot be cancelled by the applicant.
Rules surrounding the SLOC are spelled out in the Notice of Funding Opportunity issued by the NTIA in May 2022, Section IV (D) (2) (a) (ii) on page 72:
“Prior to entering into any subgrantee agreement, each prospective subgrantee shall obtain an irrevocable standby letter of credit... in a value of no less than 25 percent of the subaward amount. Eligible Entities may adopt rules under which a subgrantee may obtain a new letter of credit or renew its existing letter of credit so that it is valued at a lesser amount than originally required by the Eligible Entity upon verification that the subgrantee has met optional or required service milestones. In no event, however, shall the letter of credit have a value of less than 25 percent of the subaward amount.
“A prospective subgrantee shall provide with its letter of credit an opinion letter from legal counsel clearly stating, subject only to customary assumptions, limitations, and qualifications, that in a proceeding under Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”), the bankruptcy court would not treat the letter of credit or proceeds of the letter of credit as property of the winning subgrantee’s bankruptcy estate under Section 541 of the Bankruptcy Code.”