Keepwell`s agreements benefit bondholders because they essentially guarantee that a parent company will save a subsidiary in the event of financial difficulties for the subsidiary. This makes the subsidiary more solvent and can make it easier to issue debts or borrow money. 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. In addition, a Keepwell agreement helps improve the subsidiary`s lending through the parent company`s credit assistance. It attracts investors and reduces the risk of default, increases the subsidiary`s credit rating and reduces interest rates. 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. Keepwell`s agreements give confidence not only to lenders, but also to shareholders, bondholders and suppliers of a subsidiary. 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.
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. When a subsidiary is in a situation of money shortage and has difficulty accessing financing to continue operating, it may sign a Keepwell agreement with its parent company for a period of time. However, a Keepwell agreement may be imposed by bond trustees on behalf of bondholders if the subsidiary is late in its bond payments. Credit improvement is a risk mitigation method by which a company attempts to increase its solvency in order to attract investors to its securities offerings. Increased credit reduces the risk of credit or default, which increases a company`s overall solvency and reduces interest rates.