June 14, 2024
Private Equity: Sponsor Guarantees
For portfolio companies experiencing financial difficulties, credit support from PE sponsors may be essential in order for lenders to provide covenant relief or other accommodations to portfolio company borrowers. This Dechert memo discusses the use of sponsor guarantees and the issues that sponsors should keep in mind when considering them. This excerpt discusses which entity might serve as the source of a sponsor guaranty:
The entity providing the Sponsor Guaranty is typically the fund or funds that are the existing investors in the portfolio company, rather than the Sponsor (i.e., the advisor to the funds), but consideration should be given whether the Sponsor Guaranty can be given from the equity aggregator vehicle in the structure (particularly where there are co-investors alongside the Sponsor investment in the underlying portfolio company).
Of course, lenders will require that the Sponsor Guaranty be provided by a creditworthy entity and will need confirmation that the entities providing the Sponsor Guaranty have, and maintain during the term of the guarantee, the resources to fund the Sponsor Guaranty, whether by calling on limited partner capital commitments or accessing available fund level leverage facilities.
Though not common anymore, fund entities’ constitutive documents may prohibit or limit the provision of guarantees. In certain limited circumstances, most often related to availability of sufficient capital and/or concentration limitations, the sponsor guarantor may need a back-to-back guarantee or other financial support from a different sponsor entity in order to comply with fund governance or other limitations.
The memo also addresses issues relating to, among other things, the amount of the guaranty, payment triggers, the timing and amount of payments following a triggering event, the interplay between sponsor contributions and equity cure provisions in underlying loan documents, and events which will trigger a reduction or termination of the sponsor guaranty.
– John Jenkins