Of everything in a facility agreement, the guarantee is the clause borrowers accept most quickly and regret most often. It is presented as standard, it costs nothing on the day it is signed, and it is the only term that can follow a person after the asset is gone.
It is worth being unsentimental about what a guarantee is: a promise that if the borrower does not pay, the guarantor will, from whatever they own. Not from the asset that was financed. From everything.
When a lender is genuinely entitled to ask
There are cases where a guarantee is a reasonable request. Where the loan to value is high enough that a fall in value would leave the lender short. Where the borrower is a newly formed company with no history. Where the transaction depends on the borrower doing something, such as completing a building, and the lender wants the person responsible to have skin in the outcome. Where there is construction risk, a completion guarantee narrowly drawn to that risk is a normal market term.
And there are cases where the request is simply a negotiating position: full first charge security at a conservative loan to value, a liquid asset, an experienced borrower, and a personal guarantee on top because nobody pushed back. That is worth recognising, because it is negotiable in a way the interest rate frequently is not.
The forms it takes, and they are not equivalent
A guarantee can be joint and several, meaning the lender can pursue the guarantor directly without first exhausting the borrower or the security. It can be limited to an amount, to a period, or to a specific obligation such as completion or the accuracy of information given. It can fall away on a trigger, such as the asset reaching a stated valuation or a certain proportion of the debt being repaid.
The difference between an unlimited joint and several guarantee and one capped at a stated figure that releases on a defined event is the difference between two entirely different transactions. Borrowers sign the first believing they signed the second.
Nobody negotiates a guarantee once it has been called. The only moment it can be shaped is the moment it feels least important.
What to negotiate, in order of value
A cap, expressed as an amount rather than as a proportion of something that can move. A release mechanism tied to an event that will actually occur, such as repayment below a threshold or practical completion, rather than to the lender’s discretion. A requirement that the lender enforce the security first, before pursuing the guarantor. Exclusion of default interest and costs from the capped amount, since these can quietly double an exposure. And an end date.
Where two or more people guarantee together, the allocation between them matters as much as the total. Joint and several liability between partners means the lender can pursue whichever of them is easiest to reach, and the one who pays is left to recover from the others. A side agreement between guarantors is cheap to draft and valuable exactly once.
Corporate guarantees carry different problems
When the guarantor is a company rather than a person, the questions change but do not disappear. The guarantee has to be within the company’s objects and permitted by its constitution. Its directors have to be able to show corporate benefit, because giving away the company’s credit for no return is a decision that can be examined later, particularly if the group runs into difficulty. In the Netherlands this connects directly to directors liability in a Dutch BV.
There is also a transfer pricing dimension that groups regularly overlook. A guarantee has economic value, and where it is given across borders between related parties it should be priced and documented. We set out the approach in our note on pricing debt inside a group. Unpriced guarantees sitting in a group structure are a standing invitation for an adjustment.
What a guarantee should tell you about the deal
Read the request diagnostically. A lender that wants a broad personal guarantee on a conservatively leveraged, liquid asset is telling you it is not confident in the asset, the exit, or the borrower. That is information worth having before signing, and sometimes worth acting on by not signing.
Conversely, a lender that accepts a capped guarantee limited to completion risk, releasing on delivery, has understood the transaction. The negotiation over the guarantee is often the clearest signal available about whether the lender has actually underwritten the deal or is relying on the borrower to make good whatever it has not analysed. The same principle runs through our note on where non-bank finance fits.
Montclare structures and arranges financing secured on European assets, and prepares the corporate and tax structure that sits behind it. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. Lending and credit intermediation are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.