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Parent Company Guarantees

Unlike a bank guarantee that is issued by a bank and has a financial value to it, the Parent Company Guarantee is not a financial instrument but merely a written undertaking by Contractors ultimate parent to Client, guaranteeing performance and undertaking to complete obligations under the Contract in the event of default for any reason by the Contractor (a subsidiary of such parent).

Parent Company Guarantees are normally sought from Contractors, especially where the company entering into the Contract has limited assets while being a part of a larger group. Such companies may not have a capital of their own as all their revenues and profits could be repatriated back to their parent company and Clients do not get a proper chance to contract with the ultimate parent or holding company. It could also be that the Contractor present in a local location could have partnerships that might not be as easily trusted by a Client with respect to its technical, financial or other capabilities as much as it would trust Contractors parent company.

Bank guarantees could also be substituted by a Parent Company Guarantee in situations where there is not a strong need felt for having in place a financial guarantee especially when the Contractor is reputed/well known to the Client. In such cases it also makes commercial sense since bank guarantees come with a cost.

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