Corporate guarantee

Corporate guarantee
See also
Indemnity bond Risk retention group Cross Default External sources of finance Automatic Premium Loan Depository bond Credit management Direct lease Loss Payee

Corporate guarantee is a type of financial mechanism used to demonstrate company's financial responsibility for closure and liability obligations . It is a contract between the guarantor and the debtor, in which the former agrees to take the responsibility of the latter's obligations. The corporate guarantee can be used in two forms :

1. Corporate guarantee of the full debt – a standard guarantee that is designed to include the full faith and credit of the guarantor. There is also a possibility of the guarantee containing a limitation on recourse itself.
2. Corporate guarantee of a portion of the debt – this partial guarantee creates a risk of a project non-completion for the lender on the unguaranteed portion of the loan, but the minimum amount of post-completion non-recourse debt is determined not after the completion, but at the outset. This form of guarantee also helps with reducing the pressure on banks to fund cost overruns.

Usage of the corporate guarantee

It is a soft type of guarantee which is typically used when:

• the risk of default is low,
• the closure plan and estimation of cost is independently confirmed (which indicates that the technical risk is low),
• the closure has a short-term nature,
• the company has relevant financial strength to support the guarantee (for example an investment grade rating).

The corporate guarantee policy

An owner or operator can receive the corporate guarantee from:

• a direct or higher-tier parent corporation,
• a company that shares the same parent corporation as the owner or operator,
• a company that has a "substantial business relationship" with the owner or operator.

This substantial business relationship is an extension of a business relationship that is necessary under applicable state law in order to make a guarantee contract issued to that relationship as valid and enforceable. This relationship “must arise from a pattern of recent or ongoing business transactions in addition to the guarantee itself, such that a currently existing business relationship between the guarantor and the owner or operator is demonstrated to the satisfaction of the applicable EPA Regional Administrator” .

References

• Bergkamp L., Goldsmith B., (2013), The EU Environmental Liability Directive: A Commentary, OUP Oxford
• Financial Responsibility for Underground Storage Tanks: A Reference Manual, (2000), DIANE Publishing
• Garret T.L., (2004), The RCRA Practice Manual, American Bar Association, p. 204-208
• Lima H.M., Costa F.L., Peixoto R., Caldiera V., (2003), Financial guarantee for mine closure, "REM: Revista Escola de Minas", Vol. 56 Issue: 3, p. 183
• Morri G., Mazza A., (2014), Property Finance: An International Approach. The Wiley Finance Series John Wiley & Sons
• Office of the Federal Register (US), (2010), Code of Federal Regulations, Title 40, Protection of Environment, Pt. 260-265, Revised as of July 1, 2010, Government Printing Office
• Terry B.J., (1997), The International Handbook of Corporate Finance. Glenlake Business Reference Books, Taylor & Francis, p. 340

Author: Monika Ptasińska