What Is A Keep Well Agreement

The Keep Well agreement refers to a legal contract initiated by a parent company with its subsidiary to maintain financial support and solvency during the agreed period. A subsidiary refers to a company in which fifty per cent of the shares are held by a parent company. The support provided in the contract gives confidence to potential lenders and at the same time increases the solvency of the subsidiary. The specified warranty period depends on what both parties agree at the time of conclusion of the contract. As long as the term of the Keepwell contract is still active, the parent company guarantees the interest payments and/or repayment obligations of the subsidiary. If the subsidiary encounters solvency problems, its bondholders and lenders make sufficient use of the parent company. The document is usually of a certain duration, depending on what both parties have agreed. This means that the parent company, if the contract is active, continues to guarantee the obligation to pay the principal and interest of the subsidiary. Thus, if the subsidiary encounters solvency problems, its shareholders and lenders are covered by the parent company.

Keepwell agreements place trust not only on lenders, but also on shareholders, bondholders and suppliers of a subsidiary. Company A agrees and both sign the agreement. The creditworthiness of company B is significantly higher today than before. He can now get a loan at much lower interest rates. A Keepwell agreement assures bondholders and lenders that the subsidiary can meet its financial obligations and continue to operate smoothly. The parent company assumes responsibility for maintaining the subsidiary in a sound financial position. Keepwell agreements benefit bondholders because they essentially guarantee that a parent company will bail out a subsidiary if that subsidiary encounters financial difficulties. This makes the subsidiary more solvent and thus facilitates the taking of debts or the borrowing of money. 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 period of time. A Keepwell agreement can be called a comfort letterThe comfort letterA comfort letter is an insurance document from a parent company to convince a subsidiary of its willingness to provide financial support. .