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On the Radar

SEC Reporting Considerations for Guarantees and Collateralizations

August 2023
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On the Radar
SEC Reporting Considerations for Guarantees and Collateralizations

SEC registrants may issue a variety of debt or debt-like securities to finance their operations. In certain cases, a registrant may offer credit enhancement arrangements under which (1) subsidiaries of the registrant guarantee the debt or debt-like securities or (2) the registrant pledges the securities of its affiliates as collateral. In addition, for various reasons, a subsidiary of the registrant (rather than the registrant) may issue debt or debt-like securities. While these structures or credit enhancement arrangements may be beneficial from a cost-of-capital perspective, registrants should consider the SEC reporting implications under SEC Regulation S-X, Rules 3-10, 3-16, 13-01, and 13-02, and related complexities.
Guarantees of debt or debt-like securities that are registered under the Securities Act of 1933 are considered securities themselves under that legislation. Therefore, such guarantees, in addition to offerings of the guaranteed securities, must be registered with the SEC unless they are exempt from registration. Once a company registers them, an SEC reporting obligation is established for each subsidiary issuer or guarantor under which the following (not all-inclusive) must be provided separately:
  • Full annual financial statements prepared in accordance with applicable accounting standards and audited in accordance with PCAOB standards.
  • An annual assessment of internal control over financial reporting.
  • Quarterly reporting of condensed financial information.
  • MD&A.
Given how burdensome these requirements can be, the SEC typically permits registrants to provide alternative nonfinancial and financial disclosures as follows in their financial statements or MD&A as a form of relief in certain circumstances:
Nonfinancial Disclosures
  • A description of the issuers and guarantors.
  • The terms and conditions of the guarantees, including whether a subsidiary guarantee is not full and unconditional or joint and several.
  • Factors that may affect payments to holders of the guaranteed securities, including, but not limited to:
    • The structure of and relationship between issuers, guarantors, and nonguarantors.
    • Restrictions on dividends.
    • Limitations on enforceability of the guarantees.
    • The rights of noncontrolling interests.
Financial Disclosures
Summarized financial information of the issuer and guarantors consisting of the following line items, together with a brief description of the basis of presentation:
  • Current and noncurrent assets.
  • Current and noncurrent liabilities.
  • Redeemable preferred stock.
  • Noncontrolling interests.
  • Revenues.
  • Gross profit.
  • Income (loss) from continuing operations.
  • Net income (loss).
  • Net income (loss) attributable to the entity.
It is significantly less costly and burdensome for a registrant to provide these alternative disclosures than comply with separate SEC reporting obligations for each subsidiary issuer and guarantor. Thus, before issuing securities, a registrant should determine whether it qualifies for such relief on the basis of the contemplated legal structure and consult with SEC legal counsel as appropriate. A registrant is eligible to provide alternative disclosures if its securities are issued or fully and unconditionally guaranteed by a parent company registrant, all issuers and guarantors are consolidated subsidiaries of the parent company, the securities are debt or debt-like, and one of the following guarantee structures is used:
  1. The parent company registrant issues (or co-issues on a joint-and-several basis with one or more of its consolidated subsidiaries) securities, and any guarantees are provided by one or more consolidated subsidiaries.
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  2. A consolidated subsidiary issues (or co-issues with one or more other consolidated subsidiaries of the parent company registrant) the securities, and the securities are fully and unconditionally guaranteed by the registrant/parent company.
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