“We are being asked to provide a guarantee to the supplier of one of our subsidiaries to support its credit limit with that supplier (since we pull off regular dividends from the subsidiary). The supplier is another UK listed plc and I wondered how common this practice is as our subs don’t do it with their customers.”
We provide Parent Company Guarantees for our subsidiaries usually in response to customer requests for support in relation to new contracts. We limit our liability to the value of the customer contract. We have standard wording agreed with our legal advisers and try and use this as a starting point whenever possible.
On very rare occasions, we have been asked to provide Parent Company Guarantees for suppliers to our US businesses. In those cases we have had to work with US Guarantee wording but have been able to negotiate changes where needed.
We would certainly not be happy to provide Bank Guarantees to suppliers to our subsidiaries. We normally only provide Bank Guarntees to customers of our subsidiaries where this requirement is negotiated as part of the original contract.
This is standard practice in the retail sector. In other industries I have managed to avoid using the listed company as a guarantor but, in retail ,the business is so fast paced and the sub sometimes needs the stock so quickly you can’t afford to have protracted legal discussions over this sort of thing.
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Like others, we avoid, but would support if there was no other option. The only point I would add to the trail is that the subsidiary should pay for the guarantee (at an arms’ length price), in order to satisfy transfer pricing rules. Currently these only seem to be enforced for cross-border transactions, but HMRC are starting to challenge transfer pricing between UK companies as well, so best to start off properly.
We provide Parent Company Guarantees occasionally (perhaps 5 per annum) to guarantee the performance of a subsidiary company on a contract. Typically these are limited to the value of the contract and consequential losses are excluded.
We have never been asked to provide a specific guarantee to support a credit limit however.
We don’t routinely offer guarantees (or receive requests to do so). We incorporated a new subsidiary company earlier this year which has a typical shelf company balance sheet and anticipated requests for guarantees of low-value obligations, so amended our Schedule of Matters reserved for the Board’s decision to read:
“Approval of the giving of any guarantee with a potential liability exceeding $500,000, or any security, by any Group company”
However, in order to execte any guarantees we would still need to obtain the consent of our lenders under the Group’s various debt facilities.
As an aside, we owned a contruction company until the late 1990s. As the ultimate holding company, we were routinely asked to give, and duly gave, guarantees of that subidiary’s obligations under building contracts. This is normal practice in that industry (I know this from a previous job many years ago) so the questioner may need to factor the sector question into their thinking.
Banking documentation usually restricts the giving of guarantees. We are increasingly under significant pressure to provide guarantees, particularly as credit insurance is being sought by more and more suppliers. Also consider the position of inter-company loans, as subsidiary directors may be requiring support letters from the parent company as part of the accounts sign off. These letters can have differing interpretations across European jurisdictions, and can be binding.
We are an AIM co. We have been asked to provide guarantees for subsidiaries and try not to do this where at all possible. Initially we offer a guarantee from another group company below the plc and see if that is sufficient, usually it is, sometimes it’s not. You need to make sure that relevant company is able to give guarantees per any banking agreements.
This is becoming more frequent in these difficult times as credit rating has become more severe but we are resisting this .it should be considered also against banking arrangements where a negative pledge clause would usually not permit such a guarantee unless agreed first by the bank which will be very difficult and expensive at the current time
Our position is consistent with that of the first FTSE 250 response.
As a general rule we resist providing parent company guarantees for subsidiary companies. However, there are times when the credit rating of the subsidiary may not be sufficient for the supplier. At the present time, suppliers are paying far more attention to their credit control processes and I expect more request for guarantees. Whether the guarantee is provided will ultimately depend on the commercial negotiations.
Our policy is attached fyi. Hope this helps.
1) Which entities can give guarantees?
The Group policy is that x Plc will not give guarantees in respect of any of its subsidiaries [but may, exceptionally, give guarantees for Plc related matters]. Similarly x Ltd. (100% owned main active trading subsidiary) will only give guarantees in respect of it’s own regulated business. As such, where x Ltd companies are asked to provide a guarantee from their “Ultimate Parent” they need to make it clear from the beginning that this will not be possible – although guarantees are available from substantial worth x companies sitting just below x Plc. Subject to the above, the precise company providing the guarantee will be a matter for the relevant MDs, working in conjunction with Treasury with an overall aim of keeping the Guarantor company at the lowest acceptable level.
2) When is it acceptable to give a guarantee?
It is important to remember that guarantees have a financial value and create a liability that has to be recognised in the guarantor’s books. This means that, although it is acceptable in principle to provide company guarantees (subject always to 1 above), it must be in exchange for a material benefit to the business that can be justified by the MD and is acceptable to the Group Treasurer/CFO (depending on the total value of the Guarantee). [ There will also be a maximum total value to the guarantees that can be given by any single x Company so it is important to check early on with the Group Treasurer that the proposed Guarantor has enough remaining capacity. In some circumstances a charge may need to be booked against the company requiring the guarantee.]
3) What are the mandatory conditions?
The main requirements are:-
a) The guarantee must be capped. This should preferably be by means of a maximum specified sum written into the guarantee itself. It may be acceptable to limit liability by reference to the limits on liability contained in the contract to which the guarantee relates but in this situation express approval will be required from the General Counsel’s department.
b) The guarantee must be limited in time, preferably for a specified maximum period (which increasingly in the market is limited to two years). Again, if it is necessary to relate it to the period of the contract, express approval must be obtained from the General Counsel’s department that the contractual period is sufficiently certain.
c) Guarantees should be used only for their proper purpose, namely as a mechanism by which an alternative entity will “see to it” that the obligations of a contracting party are performed in the event that the contracting party is no longer capable of performing them (normally due to insolvency). Guarantees should not be provided in a way that creates simultaneous liability for both the contracting party and the guarantor. This means that the guarantee should only be callable if the contracting party is incapable of performing its obligations, – not simply because the contract is not performing as well as hoped or because there is a dispute between the parties. In short the guarantee should only be callable as a last resort. It is appreciated that, in practical terms, this requirement does not lend itself to the same level of certainty in drafting terms as a) and b) above. General Counsel’s department should therefore be consulted if the Guarantee appears to be payable “on demand” or at least without much effort.
d) Other provisions which will generally be expected include:- Return of original guarantee at expiry, currency and amount to be specified where ever possible, proper identification and certainty about the beneficiary, assignability only allowed with the guarantor’s consent and sign off from the tax department in respect of any tax transfer pricing issues.
We are being asked to do the same with respect to the liabilities of the defined benefit pension plan that sits in our subsidiary company. I expect such requests will become more frequest-particularly given the well-publicised actions by certain international banks etc which allegedly pulled funds from UK subsidiaries back to the parent.