Financial guarantees provided by a company belonging to the same group as the borrower — within the context of debt capital market operations or bank financing — must be remunerated by the borrower. Although sometimes overlooked, determining the arm's length guarantee fee is nonetheless essential for the legal and tax certainty of these commitments.
A Multitude of Objectives
The use of financial guarantees, such as first-demand guarantees (or autonomous guarantees), cautionnement, or pledges over existing or future receivables held by the guarantor, can serve a variety of purposes. These may include meeting a prerequisite for obtaining financing, increasing the borrower’s debt capacity, securing more favorable financing terms, avoiding or simplifying the process of obtaining a credit rating, or complying with specific requirements for companies operating in regulated sectors, among others.
Since these guarantees have significant implications for all parties involved, they should, in principle, give rise to the payment of a guarantee fee, expressed as a percentage of the nominal amount guaranteed. However, if the guarantee lacks any legally binding force, the support provided to the borrower to meet its obligations would stem solely from the effects of group membership (implicit support), which does not require remuneration.
Why Remunerate These Financial Guarantees?
As a general rule, each guarantee fee must correspond to what would have been agreed between independent enterprises in comparable circumstances, i.e., it must be an arm’s length guarantee fee. In this regard, as part of the fight against base erosion, the presence and amount of remuneration applied to intra-group financial transactions are a priority for the tax authorities’ audit policy.
Furthermore, even before a tax audit, the French tax authorities have significant visibility into financial guarantees. Information about these guarantees appears, in particular, in the prospectuses for debt instruments admitted to trading on a regulated market or offered to the public, as well as in the annex dedicated to off-balance sheet commitments.
Beyond tax certainty, the payment of a guarantee fee is also crucial for ensuring compliance with the guarantor’s corporate interest. Applying a guarantee fee helps ensure that the act is concluded in the guarantor’s corporate interest, a functional concept used to assess the validity of the guarantee when it is granted by a company with unlimited liability. Additionally, the guarantee fee facilitates — or even conditions—the obtaining of prior approvals from the guarantor’s statutory or contractual bodies (committees, lenders, etc.) when establishing the off-balance sheet commitment constituted by the granted guarantee. It should also be noted that the payment of the guarantee fee will often require authorization from the borrower’s statutory or contractual bodies.
Understanding the Determinants of a Guarantee Fee
As with all intra-group financial transactions, determining a guarantee fee requires a prior analysis of the terms and conditions of both the guarantee and the guaranteed financing. This includes the functions performed, the assets used, and the risks assumed — primarily the borrower’s credit risk — by both the guarantor and the borrower, as well as market conditions and the financing policy within which the guaranteed obligation falls.
Fundamentally, the guarantee fee must be proportionate to both the benefits derived from the guarantee by the borrower and the scope of the commitments undertaken by the guarantor. In this context, analyzing the borrower’s credit risk, taking into account potential implicit support, is decisive. The same applies to the analysis of the terms and conditions of the guarantee and the guaranteed financing. These factors determine, on the one hand, the probability of the guarantee being called and the extent of the guarantor’s obligations and, on the other hand, the choice of method(s) for determining the guarantee fee.
Determining an Arm’s Length Guarantee Fee
While financial guarantees are indeed granted by independent actors such as banks and monoliners, information about these transactions is often unavailable. Nevertheless, several methods can be used to assess a guarantee fee, with the use of multiple approaches being recommended.
From the borrower’s perspective, the yield method involves assessing the maximum guarantee fee based on the potential interest savings generated by the guarantee. This approach assumes that the interest rate differential represents a relevant measure of the guarantee’s value to the borrower and the risks assumed by the guarantor. It also assumes that the borrower would not be willing to pay a guarantee fee exceeding this estimated savings.
In practice, this method first requires evaluating the interest rate that would have applied to the financing without the guarantee. This involves analyzing rates for comparable financings, based on the determined credit rating and the financing’s characteristics. The next step is to measure the differential with the interest rate applied, taking the granted guarantee into account. This differential results in the maximum guarantee fee amount.
From the guarantor’s perspective, the expected loss method is based on the extent of losses incurred in the event of the borrower’s default on the guaranteed financing. This approach first requires calculating the expected losses in the event of default, using the borrower’s probability of default and the expected recovery rate of the claim in case of default. The expected losses for the guaranteed financing, combined with the guarantor’s cost of capital, then determine the cost of the guarantee.
In the current context of interest rate volatility and the deterioration of credit quality for some companies, only the rigorous determination of guarantee fees for each financial guarantee can effectively limit the guarantor’s or borrower’s exposure to legal or tax risks.
Article co-authored by Théophile Trancart and Teddy Ben, published in La Lettre du Trésorier (June 2026). This journal is edited by the French Association of Corporate Treasurers (AFTE).