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UNDERSTANDING GUARANTEES IN FINANCE

 

The definition of a “financial guarantee” could be very wide, and could inter alia include an insurance, credit, investment or bank guarantee in some form or another. In essence though, it is a non-cancellable indemnity bond or promise / guarantee that is backed by an insurer, bank or private entity or private guarantor in order to guarantee lenders or investors that certain principal capital and interest payments will be made in certain diverse circumstances and on certain timelines.

Many insurance companies specialize in financial guarantees and similar products that are used by debt issuers as a way of attracting investors, and the use of financial guarantees is normal practice in many corporate and project finance capital structures. The structured guarantee provides lenders or investors with an additional level of comfort that the loan or investment will be repaid in the event that the principal debtor would not be able to fulfill the contractual obligations to make timely interest and/or capital payments. It also lowers the cost of financing for issuers because the guarantee typically earns the security a higher credit rating and therefore lower interest rates.

There are many types of financial guarantors in the market, providing differing guarantee offerings, and could inter alia include banks, insurers, hedge funds, asset management companies, investment and merchant banks, private guarantors, and private entities such as:

  •  Monoline insurance companies (such as ACA, AMBAC, AGC, CIFG, FGIC, FSA, MBIA, XLCA, RADIAN, etc.).
  •  Credit insurers could include Atradius, Coface, Euler Hermes and other international players. Types of guarantees could include insurance guarantees, performance bonds, payment guarantees and the like.
  •  Investment guarantees are often issued by MIGA, OPIC, IFC and like-minded development finance agencies, and
  •  Export credit agencies often provide safe and reliable investment and guarantee channels for investors and lenders alike.
  •  Banks issue a number of guarantees, such as Letters of Credit, SBLC’s, zero coupon bonds, and more.

The sum of one or more of these structured credit enhancement guarantees can then be exploited to benefit a lender and/or borrower in that collateral and credibility of the loan structure is assured by means of the underlying guarantee, rather than only the underlying business, stock, movable and immovable assets and cash flows of the business or project to be financed. Sadly, there are also a number of unscrupulous players in the market, and thus legal due diligence and the correct implementation procedure is of vital importance, and thus our reliance on external law firms assisting in the structured finance implementation process. We are also therefore in a fortunate position to have most of our risks covered via performance bonds from our financial instrument issuers.

Aggelos Capital Limited will negotiate, structure and implement the best solution for our Clients and implement this accordingly within our proprietary investment banking structures. Contact us on projects@aggeloscapital.com if you need funding for your project or business needs, but kindly note that we cannot perform miracles without costs to structure and issue such guarantees to ensure your funding!