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What is a guarantee?

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A guarantee is personal security in the form of an agreement provided by a third party, typically a parent company, to a creditor to assume a debtor’s obligation in the event the debtor does not pay or otherwise perform in accordance with a loan or other financing agreement.  A guarantee is a contingent (secondary) liability of the guarantor that is triggered only in the event of debtor default.  Together with the debtor (borrower/lessee), who owes to another party the payment of debt or satisfaction of another obligation, a guarantor is an obligor, who is accountable in whole or in part for payment or other performance of the obligation.  Guarantees may be conditional in various ways, such as with a collection guarantee.

Obligor = Debtor + Guarantor

A third party that is held liable for a debtor’s contractual performance in the event the debtor does not pay or otherwise perform on its obligation is a guarantor.  A guarantor is typically discharged of the guarantee only upon full satisfaction of the guaranteed obligation.  Guarantees must be given in exchange for a commensurate economic benefit to their guarantors.  Only if the guarantor of the residual value of a lease is not related to the lessor is it considered guaranteed.

Aircraft Lease Guaranteed by the US Ex-Im Bank

This illustrates an aircraft lease to an airline as the lessee, where the lessor in the form as an SPV purchases the aircraft from the US manufacturer with 15% of the purchase price provided by a commercial lender and 85% of the purchase price provided by a bank in the form of a loan guaranteed by the Ex-Im Bank.

Source:

This illustrates an aircraft lease to an airline as the lessee, where the lessor in the form as an SPV purchases the aircraft from the US manufacturer with 15% of the purchase price provided by a commercial lender and 85% of the purchase price provided by a bank in the form of a loan guaranteed by the Ex-Im Bank.

A parent-to-subsidiary (downstream) guarantee, where a parent guarantees a subsidiary’s debt, tends not to be questioned since a loan to a subsidiary implicitly benefits the parent.  Subsidiary-to-parent (upstream), affiliate-to-affiliate (cross-stream) and unaffiliated guarantees, however, are subject to attack as a fraudulent transfer since it is questionable how the guarantor receives reasonably equivalent value in exchange for assumption of the guarantee.  An intracompany guarantee is a guarantee granted by one member of a company group to another group member (affiliated company).

Intracompany Guarantees
This illustrates a parent-to-subsidiary guarantee, where a parent guarantees a subsidiary’s debt, a subsidiary-to-parent guarantee, where a subsidiary guarantees the parent's debt, and an affiliate-to-affiliate guarantee, where a subsidiary guarantees another subsidiary's debt.

Source:

This illustrates a parent-to-subsidiary guarantee, where a parent guarantees a subsidiary’s debt, a subsidiary-to-parent guarantee, where a subsidiary guarantees the parent's debt, and an affiliate-to-affiliate guarantee, where a subsidiary guarantees another subsidiary's debt.

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