If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of the parent might be reduced as creditors are not willing to provide as many funds to the parent if those funds may possibly be needed to rescue a parent's subsidiary.

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This is known as the contagion risk, where the financial distress of one entity spreads to others related to it. Creditors may see this as a potential risk and hence reduce the borrowing capacity of the parent company.

If a Parent Company Backs the Debt of a Foreign