Guarantees & surety
Financial Guarantee
Guarantees a defined payment obligation — a lease stream, a dealer floorplan facility, a deferred consideration — where the beneficiary needs an insurer’s covenant behind a counterparty it cannot fully assess.
Boland’s Quay, Dublin · William Murphy, CC BY-SA 2.0
Who it is for
Lessors, finance providers and corporate treasurers
What it does
- Named-obligation cover with a fixed maximum liability
- Used to enhance a counterparty’s covenant for a specific facility
- Written only where the underlying obligation is quantifiable and dated
- Subject to full financial review and, ordinarily, parent counter-indemnity
The product in full
A financial guarantee stands behind a payment rather than behind a performance. The beneficiary — a lessor, a funder, a vendor taking deferred consideration — has a counterparty whose covenant it cannot fully assess, and a defined obligation it needs paid. We guarantee that obligation, up to a stated maximum, for a term matched to it.
It is the most carefully rationed instrument in the range, and the most heavily underwritten. A performance bond can be released by the contract being completed; a payment obligation is only discharged by the money arriving. So we write these only where the obligation is quantifiable, dated and capable of being tracked — a lease stream, a floorplan facility, a deferred consideration schedule — and ordinarily only with a parent counter-indemnity behind it.
What it buys the beneficiary is a change of counterparty. Instead of assessing an operating company it cannot see through, it takes the covenant of a regulated insurer with published solvency figures. That is why the instrument exists, and why the underwriting behind it has to be as thorough as a lender’s.
Literature
Product literature is issued to appointed intermediaries. Ask your underwriter, or request it through the enquiry form.
- Financial guarantee request formOn request
- Obligation summary templateOn request
How it works
What happens, in order
From the first enquiry to the point the cover, the contract or the facility is in place.
The obligation is defined
Amount, dates, payer, payee, and what constitutes non-payment. A guarantee of an obligation that cannot be stated precisely cannot be written.
Full financial review
Audited accounts, management figures, forecasts, banking covenants and group structure. Referral to the underwriting committee is the norm rather than the exception.
Security is agreed
Ordinarily a parent counter-indemnity, sometimes with cash collateral or a charge. The maximum liability is capped in the wording.
The guarantee runs with the obligation
It amortises as the obligation is paid down, and expires when the last payment is made or at the stated long-stop date.
The numbers
A worked example
Illustrative arithmetic, so the shape of the product is visible rather than described. Nothing here is a quotation or a projection.
Guaranteeing a £1.2m lease stream
A lessor will fund £1.2m of plant for an operating subsidiary if the rental stream is guaranteed. The guarantee is written for the outstanding rentals over 48 months, capped at £1.2m, on our conditional wording with the parent counter-indemnifying.
The applicant is in band 3 — satisfactory, with some volatility — and management accounts are reviewed half-yearly.
- Bond value
- £1,200,000
- Term
- 48 months
- Indicative premium rate
- 1.87% p.a.
- Premium for the term
- £89,760
- Issuance and arrangement fee
- £750
- Total indicative cost
- £90,510
- Cost as a share of bond value
- 7.54% of bond value
How the rate is built
- Base rate — Financial Guarantee1.50% p.a.
- Financial strength — Band 3 — satisfactory, with some volatility+15%
- Security — Parent or director counter-indemnity−10%
- Wording — Conditional — default must be establishedNo adjustment
- Beneficiary — Corporate employer in Ireland, the UK or the EEA+5%
- Term — 37 – 60 months+15%
Long-dated exposure carries a term loading because the underwriter cannot re-rate it: the guarantee is priced once and stands for four years, whatever happens to the applicant’s balance sheet in the meantime.
The guarantee amortises with the obligation
Outstanding rentals guaranteed over the 48-month lease, and the maximum liability that goes with them.
View these figures as a table
| Guaranteed obligation outstanding | |
|---|---|
| Issue | £1,200,000 |
| Year 1 | £900,000 |
| Year 2 | £600,000 |
| Year 3 | £300,000 |
| Year 4 | £0 |
Suitability
Where the Financial Guarantee fits
The cases it answers, the cases it does not, and what an underwriter needs before quoting.
It is the right answer when
- A funder needs an insurer’s covenant behind a specific, dated payment obligation.
- A vendor is taking deferred consideration and wants it secured.
- A dealer floorplan or lease facility is conditional on external credit support.
Look at something else when
- The obligation is open-ended, undated or contingent on something unquantifiable.
- The applicant cannot provide audited accounts or a counter-indemnitor.
- What is really wanted is cover for non-payment across a whole ledger — that is trade credit insurance.
What we need to quote
- 1.The underlying agreement, with the payment schedule.
- 2.Three years of audited accounts, current management figures and forecasts.
- 3.Group structure, banking covenants and the proposed counter-indemnitor.
Questions
What brokers ask us about this product
Why is the rate higher than a performance bond?
Because there is no performance that can discharge it. The obligation is money, the exposure is known, and the only ways out are payment or a claim — so it is priced as credit rather than as surety.
Will you guarantee a bank facility?
Not as a substitute for the bank’s own credit assessment. We guarantee defined commercial obligations, not general borrowings, and each case is referred.
Can the cap be increased later?
Only by re-underwriting. The cap is the maximum liability we have priced, so raising it is a new decision rather than an endorsement.
Request information
Ask us about the Financial Guarantee
The form reaches an underwriter in Dublin. If you are an intermediary, say so and we will route it to the broker desk.