Credit Sleeve
What Is a Credit Sleeve?
A credit sleeve is a form of credit agreement backed by physical assets, where the sleeve giving party, known as the "sleeve provider," will offer working capital and collateral for another company, known as the "sleeve beneficiary."
The sleeve provider will basically co-guarantee certain outstanding credit arrangements that the sleeve beneficiary has with different lenders, like banks or other financial institutions, and increase the overall credit quality of the sleeve beneficiary.
How Credit Sleeve Works
A credit sleeve is a type of working capital loan most frequently found inside the energy industry, where sleeves are backed by physical energy assets and carry certain cash flow requirements for the sleeve beneficiary to keep on working.
Credit sleeve agreements are many times set up when a company has seen its credit quality decline and its access to traditional debt financing forms dry up. Credit sleeves are a form of co-guarantee, where one party steps in to legally back the other and guarantee to lenders that debts will be repaid. Assuming the credit sleeve beneficiary can't repay, the sleeve provider has physical assets that could be seized and sold to repay the debt.
A credit sleeve could likewise be utilized in a joint endeavor where one party is financially more grounded than the other.
Credit sleeve financing is helpful for a company's auxiliaries where one subsidiary is financially more substantial than another attempting to get credit from lenders. The more crucial subsidiary could give a credit sleeve backed by its assets, for example, oil reserves, to the more vulnerable subsidiary. This step permits lenders to be open to lending to the more fragile subsidiary. The credit sleeve is expected to be a short-term financing arrangement that will furnish the more vulnerable subsidiary with the working capital expected to keep up with operations.
Limitations of Credit Sleeves
A credit sleeve is intended to be a financial assistance extended to settle short-term credit troubles, so it isn't valuable in a long-term credit crisis situation. A credit sleeve varies from longer-term asset-backed financing arrangements, for example, save based lending or pre-send out financing.
Save based lending is an agreement where an oil company vows its reserves to a bank in exchange for a loan. In the event that the company neglects to repay the loan, the bank can hold onto the reserves. Pre-send out financing is an arrangement where an oil company gets a loan from a bank and consents to utilize the principal proceeds from its oil sales to repay the loan before keeping any leftover cash flows for itself.
Features
- A credit sleeve is a form of credit agreement backed by physical assets.
- Credit sleeves are a type of co-guarantee to lenders that debts incurred will be paid.
- A company going about as a "sleeve provider" offers working capital and collateral.
- A credit sleeve isn't a hold based lending or pre-trade financing device, yet it builds the overall credit quality of the sleeve beneficiary.
- A credit sleeve is intended to be a financial bandaid to mitigate short-term credit issues.
