An upstream guarantee is used to protect lenders in cases of complex financial transactions. This type of guarantee ensures that a lender will be able to receive repayment even if the parent company is unable to make it. This can be especially important in leveraged buyouts, in which debt-financed purchases may be executed and the parent company may not possess a sufficient asset base to support repayment of the loan.

To enact an upstream guarantee, a lender will require the parent company to obtain a guarantee from the subsidiary or subsidiaries. This means that the subsidiary promises to back the obligation of the parent company, in case it fails to meet its obligations to the lender. An upstream guarantee is commonly required for large, complex financial transactions and is commonly seen when a conglomerate is selling or acquiring a subsidiary or in leveraged buyouts.

For example, if a conglomerate is selling a subsidiary, a lender may require the parent company to make an upstream guarantee that they will receive their loan repayment in full, regardless of the outcome of the sale. Or, if a leveraged buyout is being made, a lender may require the parent company to obtain an upstream guarantee from a subsidiary before the loan is extended.

Upstream guaranty offers lenders an assurance that obligators they deal with who may have thin assets can honor their financial obligations. Because the guarantor is only responsible for fully backing the debt of the main obligator, in the event that it is unable to fulfill its obligations, the risk of an unpaid loan is significantly reduced. This lessens the burden on lenders, who no longer have to carefully vet the financial security of the obligator, and can instead trust that in the event that the obligator is unable to fulfill its obligations, the guarantor will make the lender whole.

In short, an upstream guarantee is a legally binding Agreement between a parent company and one or more of its subsidiaries to back the parent company's debt or obligation to a lender. As such, it ensures that the lender is protected in the event that the parent company is unable to meet its financial obligation. Upstream guarantees are used in complex financial transactions of large companies, such as leveraged buyouts, and offers them the assurance that their loan obligations will be met should the parent company fail.