Q: On Slide 30 you identify the amount of guarantor Fritz Schumacher’s readily available personal cash. Why were his checking accounts discounted to a “zero” balance but not the savings account?

A: In the event of financial crisis at any one of Mr. Schumacher’s companies, the likely cash flow to him from the companies would be reduced forcing him to use cash on hand in his checking accounts to meet personal living expenses, taxes, and personal debt service. We chose not to discount the savings account in the same way because we anticipate becoming aware of the financial crisis within the family of companies in time to approach Mr. Schumacher before he can draw down the savings account for personal use.

It’s also possible that Mr. Schumacher would “draw the line” on his use of personal savings to support the companies and would chose not to draw down the savings account. If so, the end result would be the same as assuming no cash available from the savings account to support company debt in a crisis.

If it’s been your experience that guarantors draw down or transfer savings when guaranteed companies encounter financial difficulty, please adjust your strategy in analyzing the guarantor’s financial strength to eliminate the savings account or marketable securities account balances.  

Q: How would you count liquid assets if they were jointly held?

A: Each owner of jointly held liquid assets has full and complete access to the funds those assets represent. We anticipate that a guarantor experiencing reduced cash flows or seeking to minimize the personal impact of a troubled company he or she guarantees would draw down the funds by exercising their individual rights as a joint owner.