What is a Letter of Comfort?

A letter of comfort, which is alternatively referred to as a letter of intent or a solvency opinion, is a written instrument that furnishes a degree of confidence regarding the ultimate fulfillment of a commitment. Traditionally, external auditors provide organizations or interested parties with a letter of comfort about statutory audits, statements, and reports utilized in a prospectus. There will be a letter of comfort with the preliminary statements assuring that any changes won’t materially differ from the final version.

Understanding

Practically speaking, auditors frequently issue letters of comfort to lenders through solvency opinions concerning the borrower’s ability to repay the loan. They are opinions regarding the solvency of the fundamental company and are not guarantees.

Underwriters may also receive letters of comfort as an undertaking to conduct a “reasonable investigation” into securities offerings. The reports will be ensured to adhere to generally accepted accounting principles (GAAP) through these letters of comfort. This facilitates the underwriter’s comprehension of financial data elements, such as unaudited financial reports and adjustments to financial statements, which might not be disclosed otherwise.

Another expansive classification of letter of comfort applications pertains to the primary organization that operates a subsidiary. In this manner, a parent company may authorize a subsidiary to borrow from a local bank or provide a letter of comfort (also referred to as a keepwell agreement) to a subsidiary’s supplier regarding a substantial purchase order of raw materials.

One advantage of a Letter of Comfort

The parameters of a business transaction between two parties can be outlined in writing using a letter of comfort. Most significant business transactions necessitate a substantial investment of time from management to conduct due diligence and reach a final agreement. The measures that each party agrees to take to ensure the successful completion of the transaction may be outlined in a letter of comfort. Every party involved can be reassured that the time and effort invested in accomplishing these tasks will be amply rewarded with a letter of comfort that is skillfully composed.

While the terms of the letter of comfort do not bind the parties involved, they may contain legally binding provisions. The letter of comfort allows the involved parties to express these legally enforceable provisions in detail. An instance of a legally binding provision could stipulate that, in the event of one party terminating the agreement, the other party would be entitled to a monetary quantity. This amount could potentially correspond to the expenses accrued by the party that has remained in the agreement.

Additionally, a letter of comfort may contain legally binding confidentiality provisions that specify what the involved parties are authorized and prohibited from disclosing to third parties concerning the transaction. A letter of comfort may contain various legally enforceable provisions, such as non-compete agreements or the employment of specific executive personnel if the transaction proceeds.

Furthermore, a letter of comfort may bolster an organization’s prospects of securing essential funding. The company can submit a statement attesting to a dependable third party’s ability to repay a loan to the lending institution to substantiate its creditworthiness. Although numerous factors will influence the lending institution’s decision, a letter of comfort that persuades it can be crucial on behalf of the business.

Particular Considerations

Letters of consolation commonly use ambiguous language to shield the issuer from incurring legally binding obligations. Frequently, a letter of consolation imposes a moral rather than a legal obligation on the issuer.

In most cases, businesses will not provide letters of assurance unless it is essential. This is because the company could incur financial liability in an unforeseen circumstance. For instance, if a subsidiary fails to repay a debt, the parent company could potentially incur significant legal expenses to demonstrate that its letter of comfort did not implicitly guarantee the payment obligation of its subsidiary, or it could be held liable for the entire amount if the letter of comfort was inadequately drafted.

Conclusion

• Someone writes a letter of comfort to give them peace of mind that they will eventually meet their obligations.
• A letter of comfort usually uses general language so the person writing it doesn’t have to bind themselves to something officially.
• A letter of comfort can have many clauses, such as not competing, keeping things secret, or paying one party if the other party backs out of a deal.
• If a parent company wants to help its subsidiary get credit or money, it can write a letter of comfort on behalf of the subsidiary.