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irrevocable letter of credit (ILOC)

The ILOC or standby letter of credit is a contractual agreement between a financial institution (a bank) and the party to which the letter is issued. It requires the bank to pay against drafts meeting the terms of the letter of credit. ILOCs may be used to collateralize monies owed by an insured under various types of risk financing programs (e.g., deductibles and paid loss retros). They may also be used as a form of guarantee in the construction context, where they have the advantage of not being subject to the preference claim in a bankruptcy filing.

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