Posted in Finance, Accounting and Economics Terms, Total Reads: 644
Definition: Upstream Guarantee
An upstream guarantee exists when a subsidiary promises to fulfil its parent’s debt obligation. Upstream guarantee is a way to share liability, expand available collateral and improve the financing terms for the parent company.
Normally, a lender will assert on an upstream guarantee when it lends to a parent company which has only stock ownership of a subsidiary as an asset. In this kind of corporate structure, the subsidiary owns largely all the assets upon which the lender takes its credit decision. To make sure of its intention that it will consider the subsidiary’s assets for repayment of the debt given to the parent, a lender usually will make the subsidiary commit to guarantee the parent’s obligation and commonly, offer the lender with a security interest in the subsidiary’s assets. In exchange, the parent receives favourable financing terms, indicating the improved creditworthiness of the corporate group.
For example: Consider a leveraged buyout, where the parent company X buys a company Y. The company X will take significant amount of debt to acquire the other company. For the acquisition to take place and the amount to be disbursed to the parent company by a lender, an upstream guarantee may be necessary because the parent company X may not have enough assets to pledge as collateral.