Credit Enhancement: Third Party Corporate Guarantees in Nigeria

Abstract

Credit enhancement is one of the mechanisms through which a borrower seeks to improve its debt or creditworthiness thus providing reassurance to the lender and hopefully securing better financing terms for a loan. This attempt at reassurance simply means that the borrower evinces an ability to honour the repayment obligations under the loan or in the alternative, would satisfy this obligation through the collateral provided in support of the loan. Forms of credit enhancement include letters of credit, guarantees, insurances or the provision of additional collateral. The focus of this article is one of these forms of credit enhancement which is a third party corporate guarantee.A third party corporate guarantee is simply an undertaking by a third party company to a lender that the third party would be secondarily liable for the debt of the principal to whom a loan is advanced (in the event of default by such principal).It is not uncommon for Nigerian lenders to request corporate guarantees as part of the conditions precedent for a loan and the borrowers, for their part, are all too eager to provide such corporate guarantees. The facility with which borrowers provide third party corporate guarantees, besides the fact that a borrower is at its most cooperative before a loan is advanced, presupposes that borrowers do not give much thought to the validity of these guarantees. Similarly, few lenders pay close attention to such corporate guarantees once received beyond checking a box on the condition precedent checklist. This attitude can prove very costly in the long run both in financial and enforcement terms. The place of this article is to examine the requirements for the validity and enforceability of third party corporate guarantees in Nigeria.