Letter of Comfort

What Is a Letter of Comfort?

A letter of comfort — otherwise called a letter of intent or a solvency assessment — is a written document that gives a level of assurance that an obligation will eventually be met. In its traditional setting, a letter of comfort is given to organizations or people of interest by outer auditors in regards to statutory audits, statements, and reports utilized in a prospectus. The letter of comfort will be joined to the preliminary statements as assurance that it won't be substantially not the same as the last adaptation.

Grasping a Letter of Comfort

In functional purposes, letters of comfort are frequently issued by auditors to lenders as solvency feelings on whether a borrower can meet the payment obligations of a loan. They are suppositions, not guarantees, that the underlying company will remain solvent.

Letters of comfort can likewise be issued to underwriters as an obligation to carry out "sensible examination" into offerings of securities. These letters of comfort will guarantee that the reports adjust to generally accepted accounting principles (GAAP). This assists the underwriter with bettering comprehend parts of the financial data that could not in any case be reported, like changes to financial statements and unaudited financial reports.

Yet one more broad category of letter of comfort application is parent company to subsidiary, by which a parent company can, for instance, issue a letter of comfort (otherwise called a keepwell agreement) for the benefit of a subsidiary that necessities to borrow from a bank in its region, or give a letter to a provider of a subsidiary that desires to execute a large purchase order of raw materials.

Benefits of a Letter of Comfort

Two parties in a business deal can utilize a letter of comfort to put recorded as a hard copy the diagram of the terms of their deal. Most major business transactions call for a ton of investment on administration's part to perform due diligence before they can finish a deal. A letter of comfort can summarize the means each party consents to take to guarantee the effective completion of the transaction. An elegantly composed letter of comfort can guarantee each party that the time spent on finishing these jobs will be definitely worth the work.

Albeit the letter of comfort isn't binding between the two parties, it might have binding provisions. The letter of comfort gives an opportunity to the two parties to explain these binding provisions plainly. For instance, a binding provision could state that one party owes the other party a sum of money would it be a good idea for it choose to pull out of the deal. This sum of money may be equivalent to the costs incurred by the party who has not left the deal.

A letter of comfort could likewise incorporate binding provisions in regards to confidentiality specifying what the parties might uncover to outside parties with respect to the transaction. A letter of comfort can have many binding provisions, including ones with respect to non-competition or the hiring of certain executive employees should the deal go through.

On the off chance that a deal goes through, the terms of the last contract will override the subtleties framed in the letter of comfort.

A letter of comfort can likewise upgrade a company's ability to get genuinely necessary funding. In the event that a dependable, third-party validates the company's capacity to repay a loan, the company can introduce this statement to the lending institution as evidence of its creditworthiness. While the lending institution will consider many factors in its decision, a powerful letter of comfort can be a critical factor for the company's sake.

Special Considerations

A letter of comfort is regularly framed in dubious phrasing, to keep the issuer from being burdened with a legally enforceable obligation. As a rule, a letter of comfort makes a moral obligation for the issuer as opposed to a legal one.

Companies generally don't outfit letters of comfort except if totally fundamental. This is on the grounds that in the most dire outcome imaginable the company might be on the hook financially should a surprising situation happen. For instance, assuming that a subsidiary can't repay a debt, the parent company may either be at risk for the full amount assuming that the letter of comfort was inadequately phrased, or may need to cause costly legal fees to demonstrate that its letter of comfort was not an inferred guarantee of its subsidiary's payment obligation.

Features

• A letter of comfort is a written document that gives a level of assurance that an obligation will at last be met.
• A letter of comfort is in many cases framed in obscure phrasing, to keep the issuer from being burdened with a legally enforceable obligation.
• A parent company might compose a letter of comfort for the benefit of its subsidiary to help the subsidiary in getting credit or financing.
• A letter of comfort can contain various provisions, including ones with respect to non-rivalry, confidentiality, or compensation to one party in the event that another party quits a deal.