Failure to take control of guarantor discussions early in a refinancing can lead to unnecessary costs and delays. So what do you need to be aware of when assessing your guarantor composition? We look at how you can put together a proposition that keeps your deal moving smoothly.
Take control of guarantor discussions early
When you are preparing for a refinance and have agreed on the economic and performance metrics, it’s important to turn your attention to your required guarantor composition at an early stage. Doing so can streamline your transaction and, importantly, save you time and cost.
What funders are looking for in guarantor coverage
As you’ll be aware, borrowing usually takes place at the parent/upper level of a group with cash then distributed intra-group as required by the operational needs of the group. However, to enhance debt recovery in an insolvency scenario, funders will generally also want to have direct recourse to subsidiary companies deemed to be material. Decisions on this will usually be based on the scale of the assets, profit and/or turnover of individual group companies.
Funders will usually have 2 distinct requirements – first, a requirement that the aggregate assets, profit and/or turnover of the guarantors to exceed a minimum percentage of total group assets, profit and/or turnover and second a requirement that any group company with material assets, profit and/or turnover is a guarantor. For businesses with a global presence and material subsidiaries overseas, this means that things can quickly get complicated.
The importance of a cost/benefit analysis
To reduce complexity and avoid unnecessary cost, it’s important to do a cost/benefit analysis. Start by assessing where material profit is earned, key assets are held and important services are performed in your group. Also, establish the relevant jurisdictions. Next, working with your legal advisers, consider the upfront costs of granting a guarantee in these jurisdictions and the likely value that your funders would realise by calling on the guarantee in an insolvency scenario (bearing in mind that a number of jurisdictions restrict the scope of guarantor liability).
Identify the win-win guarantor package
Once you have completed your cost/benefit analysis, you’ll then be able to identify the guarantor package that both satisfies your funders' reasonable credit requirements and works well for your business. In some cases, you may earn profit or hold assets in jurisdictions where it would be too costly to grant a guarantee and/or where your funders would be unlikely to enjoy meaningful financial recovery. If so, discuss with your advisers what alternative comfort you could propose to your funders in the absence of a guarantee. Also, make sure that these costly jurisdictions are carved out of ongoing guarantor coverage obligations.
Challenge some of your funder’s assumptions
Be aware that, to ease their ability to enforce guarantees, a funder will often initially assume that intermediate holding companies of material companies will also provide guarantees. If so, you may want to query the relevance and/or value of this in an unsecured facility. If you will be providing security for funding, consider whether asset-specific security is necessary (with the additional costs that this entails) or if share security would be sufficient.
Enjoy a more time (and cost) efficient refinancing
By addressing these issues at an early stage, you’ll be able to present a well thought-out and reasoned guarantor proposition that takes account of your business' geographic footprint and acknowledges the requirements of your funders. And this in turn will help make your transaction faster and more cost-effective.
If you’d like to discuss guarantor coverage, please contact Natalie Hewitt or Sarah Stokes.
Look out for the next article in our ‘Financing your business: More flow, less friction’ series. This will look at the new National Security and Investment Act and its impact on funding for acquisitions.