Financial Guarantee

Financial guarantees are common in consumer, corporate and institutional finance. In all cases, they refer to a contractual guarantee given by the guarantor that interest and principal under a financing will be taken on by the guarantor if the borrower of record defaults. Depending on the guarantee contract, a guarantor may be required to post collateral for the underlying debt. Financial guarantees are fairly common in corporate funding situations, where parent companies or other subsidiaries of a borrower of record act as guarantors. Highly rated insurance companies also grant guarantees for a fee. An insurance guarantee will invariably enable the borrower the secure financing at a lower cost that exceeds the cost of the guarantor fee. (A guarantee granted by an entity that is more highly rated than the borrower of record will offer the borrower a better cost of funds.)