Guarantees

What are Guarantees?

A guarantee is a legal obligation to perform certain acts or make certain payments in the event that a third party fails to honour their obligation to do so or vice versa.

A guarantee document is any legal document that evidences the obligations that your company will have to fulfill on behalf of a third party in case the third party fails to meet them or vice versa.

Guarantees are usually given to financial or non- financial institutions before entering into a funding or purchase agreement with them.

The document will typically include information on the type of agreement; terms and conditions, and roles and responsibilities related to the obligations; tenure of the guarantee; and details on the parties involved. It also captures details of all previous obligations fulfilled by your company. The obligations commonly covered under such an arrangement include:

• To purchase, pay, or supply funds for repaying a debt on behalf of the other party
• To purchase or lease property, securities, or services on behalf of the other party
• To meet financial and operational performance requirements stipulated by the financiers or lenders on behalf of the other party

Why are Guarantees important for business today?

Having ready access to guarantee documentation enables your company to:

• Assess the nature and type of the obligations that your company has to fulfill
• Comply with the terms and conditions stipulated in the guarantee agreements
• Evaluate your company’s roles and responsibilities under such arrangements
• Meet the financial and operational performance, or covenants stipulated by the financiers or lenders
• Keep track of the status of those parties whose obligations you are guaranteeing in order to mitigate the risk that your guarantee will be called upon

Why are Guarantees important for an event tomorrow?

Ready access to guarantees documentation is important for an event tomorrow, as it helps potential investors to:

• Evaluate the level of protection offered by a third party to your company or vice versa
• Determine which guarantees related to entities within the group of entities that are involved in the proposed transaction vs those that are outside
• Assess the strategies formulated and the funds created by your company to meet such obligations
• Evaluate the breadth and depth of your company’s relationships with third parties

Pros of addressing Guarantees

• Provides potential investors with clarity over the guarantee obligations that exist to or from third parties
• Helps formulate strategies and create reserves to meet the obligations of the third party in case they fail to meet them
• Mitigates liabilities and business risks that may lead to penalties, or litigations due to any non- compliance

Cons of not addressing this topic

• Increases the timing management need to commit to a due diligence process due to the need to search through and identify these guarantee agreements or clauses
• Impacts your financial performance, as strategies and reserves to meet guarantee obligations are not formulated.