What Is an Upstream Guarantee?

An upstream guarantee, also known as a subsidiary guarantee, is a financial guarantee in which the subsidiary guaran🎀tees its paren🌠t company's debt.

An upstream guarantee can be contrasted with a 澳洲幸运5官方开奖结果体彩网:downstream guarantee, whiᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚch is a pledge placed on a loan on behalf of the borrowing par♔ty by the borrowing party's parent company 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官方开奖结果体彩网:leveraged buy-outs, when the pꦕarent company d🔜oes not have enough assets to pledge as collateral.

A payment guaranty obligates the 澳洲幸运5官方开奖结果体彩网:guarantor to pay the debt should the borrower default, regardless of whether the le🐈nder makes a demand on the borrower. Alternatively, a collection guaranty only obligates the guarantor if the lender cannot collect the amount owed after bringing a lawsuit and exhaustin♈g its remedies against the borrower. Guaranties 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 owner🌄ship of a subsidiary. In this case, the subsidiary owns substantially 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官方开奖结果体彩网: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官方开奖结果体彩网:unsecured creditor, clearly a bad outcome for the lender.

Since the 📖subsidiary guaranteeing the debt payments owns no stock in the parent company borrowing the funds, the former does not dir💧ectly receive any benefits from the loan proceeds and, hence, does not receive 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官方开奖结果体彩网:contingent liability, including any provisions th🔥at might enable the guarantor to recover 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官方开奖结果体彩网:interest rates that would be lower than it could obtain wit𒉰hout the guarantee from its parent compꩲany.

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官方开奖结果体彩网:risk of defaulting on its debt is considerably less. The guarantee is similar to one individual💜 cosigning 𒈔for another on a loan.