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 providing assurance that a particular obligation will be met. Commonly issued by entities such as external auditors, these letters guarantee that preliminary reports related to audits, statements, and prospectuses are reliable, indicating that the final versions will not vary significantly.
Key Takeaways
- Provides assurance that an obligation will be met.
- Uses cautious wording to avoid creating a legally enforceable responsibility.
- Can contain clauses like non-competition, confidentiality, and compensation mandates.
- Parent companies may issue them to help subsidiaries secure credit or financing.
Understanding a Letter of Comfort
In practice, letters of comfort are often issued by auditors to lenders to serve as opinions on a borrower’s ability to meet loan obligations. It’s important to note that these are opinions, not guarantees, about the company’s solvency. Such letters can also be directed to underwriters to ensure investigations related to security offerings follow generally accepted accounting principles (GAAP).
Moreover, a parent company might issue a letter of comfort, also known as a keepwell agreement, on behalf of a subsidiary looking to secure a loan or conduct a significant purchase of raw materials.
Benefits of a Letter of Comfort
Two parties in a business transaction can use a letter of comfort to outline the terms and understandings thoroughly. These letters can encapsulate mutually agreed-upon actions before finalizing a deal, simplifying the due diligence process. Such documents typically ensure each party understands that the collective effort is justifiable and beneficial.
Even though a letter of comfort isn’t legally binding, it often encompasses certain binding provisions. For example, a clause may ensure one party compensates the other if it withdraws from the deal. Such letters also often include confidentiality attributes to ensure sensitive details aren’t disclosed.
Aside from facilitating smoother transactions, a letter of comfort can substantially bolster a company’s ability to secure funding. It serves as evidence to a lending institution of a company’s creditworthiness when endorsed by a reputable third party.
Special Considerations
Due to potential legal repercussions, companies avoid issuing letters of comfort unless critically necessary. These letters are generally framed in ambiguous terms to avert direct legal responsibility. Companies might face financial predicaments or substantial legal expenses if an adverse situation, like a subsidiary failing to repay a loan, arises.
Related Terms: solvency opinion, keepwell agreement, due diligence, confidentiality agreement, non-compete agreement.
