When a subsidiary is having difficulty obtaining financing to continue its operations, a Keepwell agreement is useful. The parent company will support it financially and help it maintain solvency during the period defined in the agreement. When an entity enters into a De Keepwell agreement, the solvency of corporate bonds and debt securitiesThe debt instrument is an investment income asset that legally obliges the debtor to grant interest and repayments to the lender. A Deal from Keepwell allows the subsidiary to appear more solvent to lenders. It implies that the subsidiary of the subsidiary (Sub) is an entity or a commercial company wholly or partially controlled by another parent company or holding company. Ownership is determined by the percentage of shares held by the parent company, and this shareholding must be at least 51%. loans are more likely to be approved if there is a Keepwell agreement. The guarantee period is set by both parties and set at the time of the dismantling of the contract. Therefore, auditors should verify the language of the Keepwell agreement and attempt to determine potential liabilities that are not disclosed in the financial statements where there is a De Keepwell agreement. Information on potential liabilities related to the agreement can be obtained from management and third parties. The warranty time set depends on what both parties agreed upon when the contract was concluded. As long as the duration of Keepwell`s contract is still active, the parent company guarantees all interest payments and/or repayment obligations of the subsidiary.
When the subsidiary is in solvency problems, its bondholders and lenders have made sufficient use of the parent company. In order to continue production and keep interest rates low, XYZ Inc. may enter into an agreement with parent company ABC Co. on the holding framework for a term equal to the term of the loan. ABC Co. ensures that XYZ Inc. will remain financially stable for the duration of the loan. It will increase the creditworthiness of XYZ Inc. and can insure the loan with lower interest rates.
A Keepwell agreement is an agreement between a parent company and one of its junior companies. The parent company promises that it will make all financing requirements available to the subsidiary for a specified period of time. A Keepwell agreement can be characterized as a comfort letterComfort LetterA comfort letter is an insurance document from a parent company to insure a subsidiary of its willingness to provide financial support. A Keepwell agreement can also be developed to improve the credit of a loan. If a subsidiary does not make bond payments, the loan administrators may apply the agreement in the interest of the bondholders. The parent company assumes responsibility for keeping the subsidiary in good financial health. However, a Keepwell agreement is the result of negotiations prior to its creation, and it is generally more vague and less specific than traditional legal obligations. There is no guarantee that such an agreement will be implemented, as it cannot be invoked legally. A Keepwell agreement is a contract between a parent company and its subsidiary to maintain solvency and financial assistance for the duration of the agreement.