Michelex Corp (fka MLXO)

[sawdin]

There have been some postings regarding a $25,000,000 LOC. In regards to Michelex, LOC refers to a "Lettor of Credit" not a "Line of Credit". Actually, the LOC that Michelex has is an "Irrevocable Standby Letter of Credit". Thus, Michelex can not go to the issuing bank and access cash like a homeowner does when they access a Line of Credit (i.e., you get access to cash based upon pre-determined payment terms; basically a loan) to fund operations.

Here is the description of an Irrevocable Letter of Credit:
Standby Letter of Creditl

Standby Letter of Credit
The standby letter of credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon.

The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of credit.

Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date.

The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment.

The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these provisions, the bank is given until the close of the third banking day after receipt of the documents to honor the draft.

From the Draft Audit:

Note 6. Commitments and Contingencies (page 6 of the Draft Audit) states that “The Company is contingently liable under Irrevocable Standby Letters of Credit aggregating $25,000,000 which expire in July, 2013 and is automatically renewable for another 12 months. The $12,500,000 certificates of deposits have been pledged in favor of the Letter of Credit issuing bank.”