What is an ‘Upstream Guarantee’
BREAKING DOWN ‘Upstream Guarantee’
Upstream guarantees enable a parent company to obtain debt financing on better financing terms, by expanding the available collateral. They often occur in leveraged buy-outs, when the parent company does not have enough assets to pledge as collateral.
A payment guaranty obligates the guarantor to pay the debt should the borrower default, regardless of whether the lender 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 exhausting its remedies against the borrower. Guaranties can be absolute, limited or conditional.
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 contingent liability, including any provisions that might enable the guarantor to recover funds paid out in a guarantee.
If the upstream guarantee is made without the subsidiary receiving “reasonably equivalent value” in return, it might be judged to be a fraudulent conveyance in the event of the parent company going into bankruptcy.