Letter of Comfort

Letter of Comfort

A letter of comfort — also known as a letter of intent or a solvency opinion — is a written document that provides a level of assurance that an obligation will ultimately be met. Yet another broad category of letter of comfort application is parent company to subsidiary, whereby a parent company can, for example, issue a letter of comfort (also known as a keepwell agreement) on behalf of a subsidiary that needs to borrow from a bank in its locale, or provide a letter to a supplier of a subsidiary that wishes to transact a large purchase order of raw materials. For example, if a subsidiary is unable to repay a debt, the parent company may either be liable for the full amount if the letter of comfort was poorly worded, or may have to incur expensive legal fees to prove that its letter of comfort was not a tacit guarantee of its subsidiary's payment obligation. A letter of comfort — also known as a letter of intent or a solvency opinion — is a written document that provides a level of assurance that an obligation will ultimately be met. A letter of comfort can contain a variety of provisions, including ones regarding non-competition, confidentiality, or compensation to one party if another party quits a deal.

A letter of comfort is a written document that provides a level of assurance that an obligation will ultimately be met.

What Is a Letter of Comfort?

A letter of comfort — also known as a letter of intent or a solvency opinion — is a written document that provides a level of assurance that an obligation will ultimately be met. In its traditional context, a letter of comfort is given to organizations or persons of interest by external auditors regarding statutory audits, statements, and reports used in a prospectus. The letter of comfort will be attached to the preliminary statements as assurance that it will not be materially different from the final version.

A letter of comfort is a written document that provides a level of assurance that an obligation will ultimately be met.
A letter of comfort is often couched in vague wording, in order to prevent the issuer from being saddled with a legally enforceable obligation.
A letter of comfort can contain a variety of provisions, including ones regarding non-competition, confidentiality, or compensation to one party if another party quits a deal.
A parent company may write a letter of comfort on behalf of its subsidiary in order to assist the subsidiary in obtaining credit or financing.

Understanding a Letter of Comfort

In practical uses, letters of comfort are often issued by auditors to lenders as solvency opinions on whether a borrower can meet the payment obligations of a loan. They are opinions, not guarantees, that the underlying company will remain solvent.

Letters of comfort can also be issued to underwriters as an obligation to carry out "reasonable investigation" into offerings of securities. These letters of comfort will ensure that the reports conform to generally accepted accounting principles (GAAP). This helps the underwriter better understand aspects of the financial data that might not otherwise be reported, such as changes to financial statements and unaudited financial reports.

Yet another broad category of letter of comfort application is parent company to subsidiary, whereby a parent company can, for example, issue a letter of comfort (also known as a keepwell agreement) on behalf of a subsidiary that needs to borrow from a bank in its locale, or provide a letter to a supplier of a subsidiary that wishes to transact a large purchase order of raw materials.

Benefits of a Letter of Comfort

Two parties in a business deal can use a letter of comfort to put in writing the outline of the terms of their deal. Most major business transactions require a lot of time on management's part to perform due diligence before they can finalize a deal. A letter of comfort can summarize the steps each party agrees to take to ensure the successful completion of the transaction. A well-written letter of comfort can assure each party that the time spent on completing these tasks will be well worth the effort.

Although the letter of comfort is not binding between the two parties, it may have binding provisions. The letter of comfort provides an opportunity for the two parties to clearly spell out these binding provisions. For example, a binding provision might state that one party owes the other party a sum of money should it decide to pull out of the deal. This sum of money might be equal to the costs incurred by the party who has not left the deal.

A letter of comfort might also include binding provisions regarding confidentiality stipulating what the parties may or may not divulge to outside parties regarding the transaction. A letter of comfort can have a wide range of binding provisions, including ones regarding non-competition or the hiring of certain executive employees should the deal go through.

If a deal goes through, the terms of the final contract will supersede the details outlined in the letter of comfort.

A letter of comfort can also enhance a company's ability to obtain much-needed funding. If a reliable, third-party attests to the company's capacity to repay a loan, the company can present this statement to the lending institution as evidence of its creditworthiness. While the lending institution will consider many factors in its decision, a persuasive letter of comfort can be a critical factor on the company's behalf.

Special Considerations

A letter of comfort is typically couched in vague wording, in order to prevent the issuer from being saddled with a legally enforceable obligation. In many cases, a letter of comfort creates a moral obligation for the issuer rather than a legal one.

Companies generally do not furnish letters of comfort unless absolutely necessary. This is because in the worst-case scenario the company may be on the hook financially should an unexpected situation occur. For example, if a subsidiary is unable to repay a debt, the parent company may either be liable for the full amount if the letter of comfort was poorly worded, or may have to incur expensive legal fees to prove that its letter of comfort was not a tacit guarantee of its subsidiary's payment obligation.

Related terms:

Accountant's Letter

An accountant's letter is an auditor's written statement attesting to a company's financial reporting and overall financial position. read more

Auditor

An auditor is a person authorized to review and verify the accuracy of business records and ensure compliance with tax laws. read more

Comfort Letter

A comfort letter is a business document that assures the recipient that another party is able to meet the terms of an agreement being considered. read more

Confidentiality Agreement

A confidentiality agreement is a legal agreement that binds one or more parties to non-disclosure of confidential information. read more

Creditworthiness

Creditworthiness is how a lender determines that you will default on your debt obligations or how worthy you are to receive new credit. read more

Due Diligence & Uses for Stocks

Performing due diligence means thoroughly checking the financials of a potential financial decision. Here's how to do due diligence for individual stocks. read more

Indication of Interest (IOI)

Indication of Interest (IOI) is an underwriting expression showing a conditional, non-binding interest in buying a security currently in registration. read more

IOU

An IOU is a document acknowledging a debt. IOU is a phonetic version of the words "I owe you." Learn how IOUs work and when they are legal. read more

Keepwell Agreement

Also known as a comfort letter, a keepwell agreement is a contract between a parent company and its subsidiary to maintain solvency and financial backing throughout the term set in the agreement. read more

Letter of Intent (LOI)

A letter of intent (LOI) outlines the terms of a deal and serves as an “agreement to agree” between two parties. read more