Not only do the Keepwell agreements help the subsidiary and its parent company, but also strengthen the confidence of shareholders and bondholders in the subsidiary`s ability to meet its financial obligations and operate smoothly. Suppliers who supply raw materials also consider a struggling subsidiary more advantageous when it has a Keepwell deal. We can write the term either as two or three words, that is, either the Keepwell chord or the right chord. The subsidiary may design a Keepwell agreement as a form of improving the credit quality of a loan. The parent company undertakes to maintain the subsidiary in good financial health. In this case, the subsidiary is the issuer of the loan. Keepwell agreements benefit bondholders because they essentially guarantee that a parent company will bail out a subsidiary if the subsidiary is in financial difficulty. This will make the subsidiary more solvent and thus be able to borrow debt or money more easily. A keepwell agreement is an agreement between a parent company and one of its subsidiaries. The parent company undertakes to cover all the financing needs of the subsidiary.
A keepwell agreement specifies how long the parent company guarantees the financing of the subsidiary. This type of contract helps the subsidiary with the lenders. In other words, lenders are more likely to authorize loans to the subsidiary if it has a Keepwell agreement. A Keepwell agreement is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability during the term of the agreement. If a subsidiary is going through a liquidity crisis and has difficulty accessing financing to continue its activities, it can sign a Keepwell agreement with its parent company for a specified period. Because a Keepwell agreement increases the credit quality of the subsidiary, lenders allow loans for a subsidiary rather than for companies that do not have one. Suppliers are also more likely to offer more favourable terms to companies that have entered into agreements with Keepwell. Due to the financial obligation imposed on the parent company by a Keepwell agreement, the subsidiary may enjoy a better credit rating than it would without a signed agreement from Keepwell.
However, according to Bond Supermart, contrary to an adequate guarantee, Keepwell agreements are not legally binding. The warranty period set depends on what both parties agree to when concluding the contract. As long as the duration of the Keepwell contract is still active, the parent company guarantees any interest payments and/or repayment obligations of the subsidiary. If the subsidiary is in solvency difficulties, its bondholders and lenders have sufficient recourse to the parent company. However, a Keepwell agreement may be imposed by bond trusts that trade on behalf of bondholders if the subsidiary is in arrears in its bond payments. A Keepwell agreement is a contract between a parent company and its subsidiary for the maintenance of solvency and financial assistance for the duration set out in the agreement. Keepwell`s chords are also called welfare letters. Company A agrees and both sign the agreement.
Company B`s credit rating is now significantly higher than before. .