What is Accommodation Endorsement
An accommodation endorsement is an agreement for one business to back the credit liability of another. Generally, this type of agreement adds strength to the creditworthiness of the financially weaker of the two entities. For example, a parent company often provides an accommodation endorsements to a subsidiary. This lets the subsidiary enjoy the parent company's credit rating, in some instances, and often, more favorable loan terms.
BREAKING DOWN Accommodation Endorsement
An accommodation endorsement is the corporate equivalent of a loan co-signing agreement. Let's say a 19-year-old college student with only a part-time job and no credit history needs a used car for use during a summer internship. This student's parent may need to co-sign the auto loan, indicating that they are responsible for the debt if the student defaults.
Similarly, an accommodation endorsement happens when a subsidiary company applies for a loan, but it's not entirely foolproof that this entity can pay, due to its below-par balance sheet. In this case, the parent company issues an accommodation paper. This provides a promise to the bank that parent company, with far more assets, will pick up the loan if the original borrower defaults.
Accommodation endorsements are exceptionally helpful to small companies. For the large parent companies, however, accommodation endorsements don't always work out. The bank, or holder of the bank note if the loan is resold, can then go after the parent company if they are not getting paid. This is meaningful if the smaller entity borrowed substantially.
From a practical perspective, all an accommodating endorser needs to do is sign on the dotted line, indicating that this group is the financial backstop for the smaller organization or subsidiary. Similar to the way U.S. Treasuries are fully backed by the U.S. government, the parent company's reputation is now on the line for the loan.
Examples of an Accommodation Endorsement
Note that an accommodation endorser isn't always a parent company. However, it almost always has a close relationship with the borrower.
Therefore, it's possible that a larger company provides an accommodating endorsement for one of its critical suppliers. A large soda company might want to be the accommodation endorser for one of its bottlers, for example.
Accommodation endorsement also happens among the keiretsu structure of companies in Japan, where a group of enterprises take equity stakes in one another and sometimes collaborate and share projects. Again, it's the strongest of these companies providing the accommodation endorsement for the others.
Another example is a national bank that endorses the acceptances of one of its regional subsidiaries.