DEFINITION of 'Downstream Guarantee'

A guarantee placed on a loan on behalf of the borrowing party by the borrowing party's parent company or stockholder. By guaranteeing the loan for its subsidiary company, the parent company provides assurance to the subsidiary company's lenders that the subsidiary company will be able to repay the loan. The guarantee requires the parent company to repay the loan if the subsidiary is unable to.

BREAKING DOWN 'Downstream 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 interest rates that would be lower than it could obtain without the guarantee from its parent company. This is because, once backed by the financial strength of the parent company, the subsidiary company's risk of defaulting on its debt is considerably less. It is similar to one individual cosigning for another for a loan.

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