Helping clients derive competitive advantage

Credit Lining a
Corporate Guarantee

Helping clients derive competitive advantage

Credit Lining a
Corporate Guarantee

by admin
Corporate Guarantees received under leasing facility may be used by the Beneficiaries to secure lines of credit at their bank. Typically, a banker will have no objection to offering credit against Corporate Guarantees received in this manner up to 100% face value, however typical lending rates (loan to value (LTV)) will be around 50% to 80% of the face value.

If you intend to monetize or credit line a Corporate Guarantee that you have received or due to receive, It is important to ensure that the Guarantee contains no onerous conditions and that it is worded specifically for monetizing.

Drawing credit lines against a Corporate Guarantee that is conditional upon satisfaction of an action or other document may not be possible. For Example, if you have a conditional payment guarantee or rent guarantee, a lending bank will not accept to credit line it as it cannot be considered as suitable security. Generally, the purpose and intention of a Corporate Guarantee should be made clear from the outset, if your intention is to monetize or credit line the Guarantee, then the Guarantee should be specifically worded for this purpose.If it is not, then you may very well find the Guarantee is worthless.

It would also be advisable to negotiate credit lines in advance of receiving the Guarantee. To provide draft wording to a potential lender and obtain his tentative commitment or term sheet prior to requesting issue of the Guarantee would be sensible.

Risk of Credit lines drawn against a Corporate Guarantees received

If you receive a Corporate Guarantee and draw credit against it, the repayment of that credit or loan is secured by the Guarantee. It is not common practice for a bank to ask for additional security unless you exceed the face amount of the Guarantee.

However, it is not a common practice for a bank to lend credit that will certainly be defaulted leading to claim on the Guarantee. The lending bank would want some kind of assurance that the credit can be repaid. Only as a last resort will the bank look to call the Guarantee. When making applications to credit line a Guarantee, a repayment structure should always be included to demonstrate the ability to repay the credit without calling on the Guarantee.

Discounting a Corporate Guarantee

Discounting is a financial term. It means for a debtor to delay payment to a creditor for a given period of time by paying a charge or fee.

Since a Corporate Guarantee is already an instrument to secure a future or conditional payment to specific parties, Corporate Guarantees cannot be discounted.

Corporate Guarantees cannot be divisible or transferable.

Some may refer to the fact that they already have a Corporate Guarantee to their account from a third party and are willing to ‘transfer’ it to a lender in return for immediate cash. Since Corporate Guarantees are written to a specific party for a specific purpose, they cannot be transferred or divisible. They cannot be bought or sold.

Neelesh
General Manager

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