TOOL K3
see Tool K4 “Guarantors: Key Issues”
Key Questions
- What is the purpose of the guarantee?
‒ Alternative source of repayment?
‒ Moral commitment to help in the stress scenario? - Is the Bank clearly stated as the beneficiary?
- Do we have access to the legal counterparties we want? (Who are the guarantors? Are any key parties not guaranteeing?)
- Is the underlying transaction that gives rise to the guarantee correctly described?
- Is the guarantee irrevocable and on demand?
- Is the guarantee limited in amount or time?
- How does the guarantee expire? By date or on an event?
- Have we verified the execution of the guarantee?
- When does the guarantee first become effective?
- Are there any provisions which would reduce the amount of the guarantee?
| Nature of Claim | |
| Irrevocable & payable on first demand by the Bank | – This is the best wording – avoid conditional guarantees wherever possible |
| Conditional guarantees | – Does the guarantee only become effective when certain conditions have been fulfilled? – What condition has to be met before we can claim? – Who has to fulfil that condition? – Are there any deadlines on fulfilment of the condition? – What is the likelihood of that condition being fulfilled? – Does the cross default structure allow us to claim if there is no default on our facilities? – Does the guarantee survive a change of ownership of the beneficiary? Have the size / nature of facilities and relationships changed materially since the date of the guarantee? Is guarantor aware of these changes? Will they affect the validity of the guarantee? |
| Ranking claim | – A guarantee only gives the Bank a claim as an unsecured creditor on the issuer, unless the guarantee is supported with collateral. Check whether we are subordinated |
| Procedure for claiming | – What exactly is the procedure for making a claim? – Is there a grace period before we can claim? – Do we need legal advice before making a claim to ensure its validity? – Check whether there is cross border risk (see Governing law below) |
| Dispute procedure | – How are disputes to be handled? |
| Corporate Benefit | |
| Upstream guarantees | – There is a risk that upstream guarantees (from a daughter company to benefit its mother company) may be held to be invalid through lack of corporate benefit / valid consideration – Even if you suspect there is not adequate corporate benefit, you should take the upstream guarantee anyway – it will at least give the Bank a line of communication with the guarantor and any eventual liquidator / receiver – In some countries (France) upstream guarantees are simply not legally possible. In other countries (Netherlands) upstream guarantees can be limited under certain circumstances (s207 C limits the total of guarantees given to an amount equal to the guarantors “free reserves”). – Alternatives may include joint & several liability or co-debtorship of the daughter company but the issue of corporate benefit may also apply – seek legal advice! |
| Limits to the Guarantee | |
| Cover | – Does the guarantee relate to a specific facility or is it a blanket ‘all monies’ guarantee (including derivative liabilities)? |
| Amount | – Is the guarantee limited in amount? – What is that amount? – Is accrued interest and costs inclusive or exclusive of that amount? (preferably exclusive) – What currency will any claim be paid in? – If there is foreign exchange risk for the bank how is it being monitored? |
| Expiry | – How does the guarantee expire – by date or an event? |
| Time / Monitoring | – Is the guarantee limited in time? – If so, is there enough ‘daylight’ between the expiry of the underlying facility(ies) and the expiry of the guarantee to be able to make a claim? – Have we diarised the expiry of the guarantee? – How do we monitor “events” which cause the guarantee to expire? – Do we need to remind the guarantor at regular periods that we are still relying on the guarantee? |
| Legal Capacity | |
| Individuals | – Ensure Personal Guarantors are old enough to be able to act legally as guarantors – Have we verified that the execution of the guarantee is without undue influence? – Ensure the issuer is not drunk / insane / incapacitated at the time of signing |
| Corporates | – Have we checked the company’s statutes for the 1. Ability to issues guarantees? 2. Amount of debt and guarantees that can be issued – Have the signatories to the guarantee got the power to legally bind the company? Is that power limited by amount? – Do directors personally benefit from the issuance of the corporate guarantee? – Is there a conflict of interests? |
| Legal Advice | |
| Individuals | – Have we ensured the individual guarantor has received independent legal advice regarding the nature of their liability? – Has this been documented / recorded within the Bank? – There is a risk that individuals will refute their liability due to misrepresentation / misapprehension (they didn’t understand what they were signing) |
| Corporates | – For family owned and run companies the above issues also apply – For public companies legal advice may be required to protect against shareholder litigation |
| Nature of Liability | |
| Primary or secondary | – Preferably the wording should establish primary legal responsibility on the guarantor |
| Governing law / courts | – Which law is the guarantee governed by? – Which courts have jurisdiction? – UK, NY or other laws / courts are the most predictable and efficient but may not be the relevant choice if there are no assets / activities in those countries – Is the jurisdiction the same as the loan and collateral agreements? – This can be a complex legal issue – refer to and be guided by the Bank’s legal advisors |
| Internal Considerations | |
| Limits | – Are any internal limits required or need to be adjusted / recorded for the guarantor? |
| Internal ratings | – Does the Bank’s internal client and facility rating model correctly reflect the 1. Benefit to the principal? 2. Additional contingent liabilities on the guarantor? |
| Financial Spreadsheets | – Is the additional contingent liability included in the financial data / analysis of the guarantor? |
