Credit Sleeve

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Credit Sleeve

What Is a Credit Sleeve?

A credit sleeve is a kind of credit arrangement backed by physical assets in which the sleeve giving party, referred to as the “sleeve provider,” offers working capital and collateral on behalf of another firm, referred to as the “sleeve receiver.”

The sleeve provider will effectively co-guarantee certain outstanding credit arrangements that the sleeve recipient has with other lenders, such as banks or other financial institutions, and will improve the sleeve recipient’s overall credit quality.

Key Takeaways

  • A credit sleeve is a kind of credit arrangement that is collateralized by tangible assets.
  • Credit sleeves are a sort of co-guaranteed promise to lenders that debts would be paid.
  • Working capital and collateral are provided by a corporation acting as a “sleeve supplier.”
  • A credit sleeve is a financial bandage used to treat short-term credit problems.
  • A credit sleeve is neither a reserve-based lending or pre-export finance mechanism, but it helps improve the sleeve recipient’s overall credit quality.

How Credit Sleeve Works

A credit sleeve is a sort of working capital loan that is most often seen in the energy business. Sleeves are backed by physical energy assets and have certain cash flow criteria for the sleeve recipient to continue operating.

Credit sleeve agreements are often used when a company’s credit quality has deteriorated and its access to standard debt funding forms has dried up. Credit sleeves are a kind of co-guarantee in which one party steps in to legally back the other and guarantee debt repayment to lenders. If the credit sleeve recipient is unable to repay, the sleeve provider may seize and sell actual assets to settle the loan.

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In a joint venture when one side is financially stronger than the other, a credit sleeve might also be employed.

Credit sleeve financing is important for a company’s subsidiaries when one is financially more significant than another and is having difficulty obtaining credit from lenders. The more critical subsidiary might supply the weaker company with a credit sleeve guaranteed by its assets, such as oil reserves. This procedure gives lenders the confidence to lend to the weaker subsidiary. The credit sleeve is designed to be a short-term financial arrangement that will give working cash to the weaker subsidiary in order to keep operations running.

Limitations of Credit Sleeves

A credit sleeve is intended to be a financial helping hand offered to remedy short-term credit problems, hence it is ineffective in a long-term credit crisis scenario. A credit sleeve is not the same as longer-term asset-backed financing solutions like reserve-based lending or pre-export financing.

Reserve-based lending is a credit transaction in which an oil firm promises its reserves to a bank. If the corporation fails to repay the loan, the bank has the authority to take the reserves. Pre-export finance is an agreement in which an oil business takes a loan from a bank and promises to repay the loan with the initial revenues from oil sales before retaining any leftover cash flows for itself.

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