A Keepwell agreement is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability during the term of the agreement. Because a Keepwell agreement increases the credit quality of the subsidiary, lenders allow loans for a subsidiary rather than for companies that do not have one. Suppliers are also more likely to offer more favourable terms to companies that have entered into agreements with Keepwell. Due to the financial obligation imposed on the parent company by a Keepwell agreement, the subsidiary may enjoy a better credit rating than it would without a signed agreement from Keepwell. We can write the term either as two or three words, that is, either the Keepwell chord or the right chord. A Keepwell agreement is an agreement initiated between a parent company and one of its subordinate companies. The parent company promises to provide the subsidiary with all financing needs for a specified period. A Keepwell agreement can be called a management letterComfort LetterAn insurance document from a parent company is an insurance document from a parent company to convince a subsidiary of its willingness to provide financial support. If a subsidiary is having difficulty accessing financing to continue its activities, a keepwell agreement is useful. The parent company will help it financially and help it maintain its capacity to pay for the period defined in the agreement.
When an entity enters into a Keepwell agreement, the solvency of business loans and debt securities is a debt instrumentA debt instrument is a fixed-income asset that legally obliges the debtor to grant interest and repayments to the lender. However, according to Bond Supermart, contrary to an adequate guarantee, Keepwell agreements are not legally binding. Although a keepwell agreement indicates the willingness of a parent company to support its subsidiary, these agreements do not constitute guarantees. The promise to enforce these agreements is not a guarantee and cannot be invoked legally. Company A agrees and both sign the agreement. Company B`s credit rating is now significantly higher than before. He can now get credit at much lower interest rates. In addition, a Keepwell agreement helps to increase the solvency of the subsidiary through credit support from the parent company. It attracts investors and reduces the risk of default, increases the credit rating of the subsidiary and reduces interest rates. Company B asks Company A for a ten-year keepwell contract. In the contract, Company A will keep Company B solvent and financially stable for a decade. Subsequently, the chances of success in China are much greater thanks to the Keepwell agreement.
A keepwell agreement specifies how long the parent company guarantees the financing of the subsidiary. This type of contract helps the subsidiary with the lenders. In other words, lenders are more likely to authorize loans to the subsidiary if it has a Keepwell agreement. .