Subguarantee

A subguarantee is a secondary guarantee provided by a guarantor to secure the obligations guaranteed by another party under a primary guarantee. It is commonly used in surety and banking arrangements, with the subguarantor agreeing to cover all or part of the liability if the primary guarantor cannot or will not honor the guarantee.

In a typical structure, a principal debtor or project counterparty obtains a guarantee from a primary guarantor. To share risk or enhance credit support, a bank or insurer may issue a subguarantee in favor of the beneficiary, often on terms that align with the primary arrangement. The subguarantee is usually back-to-back with the primary guarantee and may specify limits, conditions, and release events.

Subguarantees are commonly used in complex projects, international trade, or supply chains where financiers require additional credit support or where a parent company seeks to extend guarantees beyond its own balance sheet. They can help allocate liability among multiple entities and provide a path for risk distribution among affiliated or related institutions.

Legal considerations include the fact that subguarantees are contracts governed by applicable law and create independent liability for the subguarantor. Enforceability often depends on coordinating the terms of both guarantees, including right of subrogation, notices, claims procedures, and any caps or triggers. Release provisions and consent requirements for substitution or modification are also important.

Risks for subguarantors include added exposure and potential impact on credit ratings, as well as regulatory and due diligence obligations. See also guarantees, letters of credit, performance bonds, and back-to-back guarantees.