A Keepwell agreement guarantees bondholders and lenders that the subsidiary can meet its financial obligations and continue to operate smoothly. A solvent subsidiary may be viewed positively by suppliers as part of the agreement. investinganswers.com/financial-dictionary/…/keepwell-agreement-5594 Keepwell agreement gives Anreger how long the parent company is willing to offer financial assistance to the subsidiary. This means that with this document, a subsidiary has a good chance that credit institutions will approve their credit applications. The contract also allows the subsidiary and suppliers to easily close transactions. Note that this document is a guarantee to suppliers that they will receive their payment. Company B is asking Company A for a 10-year agreement on Keepwell. In the contract, A Firm B will remain solvent and financially stable for a decade. Not only banks and other lenders, but also suppliers offer more favourable terms. If the subsidiary wants 90-day terms and there is no Agreement from Keepwell, it is less likely that the supplier will agree. It is less likely to approve if the subsidiary has a bad credit history or is a new customer. Although a Keepwell agreement indicates that a parent company is willing to support its subsidiary, these agreements are not guarantees. The promise to implement these agreements is not a guarantee and cannot be relied upon legally.
Company A agrees and the two sign the agreement. The creditworthiness of Company B is now much higher than before. It can now get credit at much lower interest rates. In order to keep production on track and keep the loan interest rate as low as possible, Computer Parts Inc. may enter into a Keepwell agreement with its parent company, Laptop International, to secure its financial solvency for the duration of the loan. 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. However, according to Bond Supermart, Keepwell`s agreements are not legally binding, contrary to an appropriate guarantee. 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.
Because a Keepwell agreement increases the solvency of the subsidiary, lenders are more likely to authorize loans for a subsidiary than for businesses without it. Suppliers are also more likely to offer more advantageous terms to companies that have firms that have Done Keepwell agreements. Due to the financial obligation imposed on the parent company by a Keepwell agreement, the subsidiary may receive a better credit rating than in the absence of a signed Keepwell agreement. A Keepwell agreement determines how long the parent company will guarantee the financing of the subsidiary.