Sometimes, for a variety of reasons, the Bank may not be able to obtain a traditional guaranty. In these situations, it may be possible to obtain another form of undertaking that is not normally thought of as guaranty but nonetheless serves the same general purpose. They include the following:
•Joint and Several Note: Where a person (not recipient of the loan proceeds) becomes a co-maker of a note as an accommodation to the borrower.
•Third Party Pledge Agreement: Where a person (not the borrower) pledges his assets to secure a loan made to the borrower (see above).
•Indemnity/Surety Agreement: Where a person (not the borrower) agrees to indemnify the Bank for losses incurred by the Bank in connection with a loan made to the borrower. This is substantively the same as a guaranty of collection.
•Keep-well Agreement: Where a person (not the borrower) agrees, for the benefit of a Bank, to take specific action designed to enable the borrower to repay the loan. Examples include the following:
o Covenant to maintain “solvency” of the borrower so long as the loan remains outstanding.
o Covenant to maintain “financial condition” of the borrower so as to enable the borrower to repay the loan.
o Covenant to make “cash advances” to the borrower to the extent of “cash deficiency” (i.e., excess of (i) amount past due on the loan over and (ii) cash available to the borrower for such purpose from other sources). At option of the covenant obligor, advances can be treated as:
♦ capital contribution;
♦ subscription price for additional shares of capital stock of the borrower;
♦ subordinated loan to the borrower; or
♦ any combination of the above.
♦ Subscription for additional shares of capital stock of the borrower at price sufficient to enable the borrower to repay the loan.
♦ Covenant to use “best efforts” to cause the borrower to timely repay the loan.
♦ Covenant to maintain the borrower’s “net worth” at or above specified amount at all times prior to full repayment of the loan.
♦ Covenant to “take any action that may be necessary or appropriate” to enable the borrower to timely repay the loan.
♦ Covenant to cause outstanding principal of all subordinated advances/loans made by the covenant obligor to the borrower to be not less than specified amount at any time prior to full repayment of the loan.
♦ Confirmation of “intention” of covenant obligor to (i) maintain sound financial condition of the borrower and/or (ii) cause the borrower to repay the loan.
Keep-well agreements and other forms of guaranty substitutes are fraught with problems, not the least of which is that they tend to be so vague that they are difficult to enforce. Banks should consult with Bank Counsel before accepting one of these agreements in lieu of a traditional guaranty.
•Non-disposal Agreement: Where parent corporation (not the borrower) agrees to maintain specified ownership interest (i.e., 100%) in the borrower until full repayment of the loan. Expected benefit to the Bank is based upon assumption that, as a practical matter, the parent will not allow the subsidiary (i.e., the borrower) to default on the loan. Reasonableness of this assumption depends on various factors, including (i) whether or not the parent is a publicly-held corporation, (ii) reputation and standing of the parent in financial community and (iii) existence of cross-default provisions in the parent’s loan agreements. It is common for Non-disposal Agreements to contain guaranty disclaimers.
•Contingent Purchase Agreement: Where a person (not the borrower) agrees, in certain circumstances, to purchase the borrower’s note from the Bank.
•Take-or-Pay Contract: Where a person (not the borrower) agrees, in certain circumstances related to the borrower’s debt service capacity, to purchase goods/services from the borrower. Payments to the borrower under the contract sometimes are treated as advance payments for future goods/services.