What Is a Letter of Comfort?
Let me explain what a letter of comfort is—it's also called a letter of intent or a solvency opinion. This is a written document that gives you a level of assurance that an obligation will ultimately be met. In its traditional use, you'll see it provided to organizations or interested parties by external auditors concerning statutory audits, statements, and reports in a prospectus. The letter gets attached to preliminary statements to assure you that they won't differ materially from the final version.
Key Takeaways
- A letter of comfort is a written document that provides a level of assurance that an obligation will ultimately be met.
- A letter of comfort is often couched in vague wording, in order to prevent the issuer from being saddled with a legally enforceable obligation.
- A letter of comfort can contain a variety of provisions, including ones regarding non-competition, confidentiality, or compensation to one party if another party quits a deal.
- A parent company may write a letter of comfort on behalf of its subsidiary in order to assist the subsidiary in obtaining credit or financing.
Understanding a Letter of Comfort
You should know that in practical terms, letters of comfort are often issued by auditors to lenders as solvency opinions on whether a borrower can meet loan payment obligations. These are opinions, not guarantees, that the company will stay solvent.
Letters of comfort can also go to underwriters as an obligation to perform 'reasonable investigation' into securities offerings. They ensure reports follow generally accepted accounting principles (GAAP), helping you understand unreported financial data like changes to statements or unaudited reports.
Another common use is from a parent company to a subsidiary. Here, the parent might issue a letter of comfort—also known as a keepwell agreement—to help the subsidiary borrow from a local bank or secure a large purchase order from a supplier for raw materials.
Benefits of a Letter of Comfort
If you're in a business deal, you and the other party can use a letter of comfort to outline the terms in writing. Major transactions take significant time for due diligence, and this letter summarizes the steps each side agrees to for successful completion. It assures you that the effort will be worthwhile.
Even though the letter isn't binding overall, it can include binding provisions. This lets you clearly define them, like one party owing money if they pull out, equal to the other party's incurred costs.
You might also see binding provisions on confidentiality, specifying what can or can't be shared with outsiders. The letter can cover non-competition or hiring key executives if the deal proceeds.
Remember, if the deal completes, the final contract's terms will override the letter's details.
A letter of comfort can also boost a company's funding chances. If a reliable third party attests to repayment capacity, you can present this to lenders as creditworthiness evidence. It's one factor among many, but it can be critical.
Special Considerations
You'll notice that a letter of comfort uses vague wording to avoid saddling the issuer with a legally enforceable obligation. Often, it creates a moral obligation rather than a legal one.
Companies don't issue these unless necessary, because in the worst case, they could face financial hooks. For instance, if a subsidiary can't repay a debt, a poorly worded letter might make the parent liable for the full amount, or at least lead to costly legal fights to prove it wasn't a guarantee.
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