Meaning
Contractual commitments where a parent company promises to fulfill the obligations of its subsidiary if that subsidiary fails to perform provide security to customers and vendors. These parent performance guarantees transform the promise of a local entity into the credit risk of the global group. They are common when dealing with a smaller or less capitalized branch of a large corporation.
Primary Obligation
Liability under these documents is usually triggered by a formal notice of default. The guarantor must step in to complete a project or provide a service exactly as the subsidiary was required to do.
Financial Indemnity
Paying the costs of a failure is a common alternative to physically performing the work. If the parent lacks the specific tools to build a factory, the parent performance guarantees allow for the payment of damages to hire a replacement contractor. This ensures the counterparty is made whole regardless of whether the parent company has the technical expertise to finish the job.
Duration Limit
Coverage typically lasts until the underlying contract is completed and the warranty period has expired. Once the subsidiary has satisfied every part of the deal, the parent performance guarantees are cancelled or allowed to lapse. This expiry is a milestone for the risk management department of the holding company.
The release of the guarantee frees up the credit capacity of the parent for other ventures.
