What Is an Upstream Guarantee?

An upstream guarantee, also known as a subsidiary guarantee, is a financial guarantee in whic🙈h the s𒐪ubsidiary guarantees its parent company's debt.

An upstream guarantee can be contrasted with a 澳洲幸运5开奖号码历史查询:downstream guarantee, w෴hich is a pledge placed on a loan on behalf of the borrowing party by the borrowing party's parent compꩲany or stockholder.

How Upstream Guarantees Work

Upstream guarantees enable a parent company to obtain debt financing on better financing terms, by expanding the available collateral. They often occur in 澳洲幸运5开奖号码历史查询:leveraged buy-outs, when the par⛎ent company does not have enough assets to pledge ▨as collateral.

A payment guaranty obligates the 澳洲幸运5开奖号码历史查询:guarantor to pay the debt should the borrower default, regardless of whether the lender makes a demand on the borrower. Alternatively, a collection guaranty o🌠nly obligates the guarantor if the lender cannot collect the amount owed after bringing a lawsuit and exhausting its remedies against the borrower. Guara♐nties can be absolute, limited or conditional.

Typically, a lender will insist on an upstream guaranty when it lends to a parent whose only asset is stock ownership of a subsidiary. In this case, the subsidiary owns subs🌄tantially all the assets upon which the lender bases its༒ credit decision.

The problem with upstream guarantees is that lenders are exposed to the risk of being sued for 澳洲幸运5开奖号码历史查询:fraudulent conveyance when the guarantor is insolvent or without adequate capital at the time it executed the guarantee. If the issue of fraudulent conveyance is successfully proved in a bankruptcy court, the lender would become an 澳洲幸运5开奖号码历史查询:unsecured creditor, clearly a bad outcome for the lender.

Since the subsidiary guaranteeing the debt payments owns no stock in t✨he parent company borrowing the funds, the former does not directly receive any benefits from the loan proceeds and, hence, does not rec🦩eive a reasonably equivalent value for the guarantee provided.

Upstream vs. Downstream Guarantees

An upstream guarantee, like a downstream guarantee in which the parent company guarantees the subsidiary company’s debt, does not have to be recorded as a liability on the balance sheet. However, it is disclosed as a 澳洲幸运5开奖号码历史查询:contingent liability, including any provisions that might enable the guarantor to reco🐈ver funds paid out in a guarantee.

A downstream guarantee can be undertaken in order to help a subsidiary company obtain debt financing that it otherwise would be unable to obtain, or to obtain funds at 澳洲幸运5开奖号码历史查询:interest rates ꦬ;that would be lower than it could obtain without the guarantee from its parent company.

In many instances, a lender may be willing to provide financing to a corporate borrower only if an affiliate agrees to guarantee the loan. This is because, once backed by the financial strength of the holding company, the subsidiary company's 澳洲幸运5开奖号码历史查询:risk of defaulting on its debt is considerably less. The guarantee is sওimi𒀰lar to one individual cosigning for another on a loan.