What Is a Letter of Comfort?
A letter of comfort—also known as a letter of intent or a solvency opinion—is a written report that provides a point of assurance {that a} accountability will in the end be met. In its typical context, a letter of comfort is given to organizations or people of pastime by the use of external auditors relating to statutory audits, statements, and research used in a prospectus. The letter of comfort will likely be hooked up to the preliminary statements as assurance that it is going to not be materially different from the overall style.
Key Takeaways
- A letter of comfort is a written report that provides a point of assurance {that a} accountability will in the end be met.
- A letter of comfort is frequently couched in vague wording, so to prevent the issuer from being saddled with a legally enforceable criminal duty.
- A letter of comfort can come with a large number of provisions, along with ones relating to non-competition, confidentiality, or repayment to a minimum of one get together if each and every different get together quits a deal.
- A father or mother company may write a letter of comfort on behalf of its subsidiary so to assist the subsidiary in obtaining credit score ranking or financing.
Understanding a Letter of Comfort
In good uses, letters of comfort are frequently issued by the use of auditors to lenders as solvency critiques on whether or not or no longer a borrower can meet the fee tasks of a loan. They are critiques, not guarantees, that the underlying company will keep solvent.
Letters of comfort may also be issued to underwriters as an obligation to carry out “inexpensive investigation” into possible choices of securities. The ones letters of comfort will make certain that the research agree to in most cases approved accounting concepts (GAAP). That is serving to the underwriter upper understand sides of the financial knowledge that will most likely not otherwise be reported, similar to changes to financial statements and unaudited financial research.
However each and every different large magnificence of letter of comfort device is father or mother company to subsidiary, through which a father or mother company can, for example, issue a letter of comfort (also known as a keepwell agreement) on behalf of a subsidiary that are supposed to borrow from a monetary establishment in its locale, or provide a letter to a supplier of a subsidiary that wishes to transact a large achieve order of raw materials.
Benefits of a Letter of Comfort
Two occasions in a business deal can use a letter of comfort to jot down the outline of the words of their deal. Most number one business transactions require a large number of time on regulate’s phase to perform due diligence previous to they may be able to finalize a deal. A letter of comfort can summarize the steps each and every get together has the same opinion to take to ensure the successful completion of the transaction. A well-written letter of comfort can ensure each and every get together that the time spent on completing the ones tasks will likely be successfully surely definitely worth the effort.
Despite the fact that the letter of comfort is not binding between the two occasions, it’ll have binding provisions. The letter of comfort provides an opportunity for the two occasions to clearly spell out the ones binding provisions. For example, a binding provision would most likely state that one get together owes the other get together a amount of cash will have to it decide to pull out of the deal. This amount of cash could be identical to the costs incurred by the use of the get together who has not left the deal.
A letter of comfort may additionally include binding provisions relating to confidentiality stipulating what the occasions may or would possibly not give away to out of doors occasions regarding the transaction. A letter of comfort can have relatively a large number of binding provisions, along with ones relating to non-competition or the hiring of positive govt staff will have to the deal go through.
If a deal goes by the use of, the words of the overall contract will supersede the details outlined throughout the letter of comfort.
A letter of comfort can also reinforce a company’s ability to acquire much-needed funding. If a reliable, third-party attests to the company’s capacity to repay a loan, the company can give this remark to the lending established order as evidence of its creditworthiness. While the lending established order will believe many components in its decision, a persuasive letter of comfort usually is a very important factor on the company’s behalf.
Specific Problems
A letter of comfort is usually couched in vague wording, so to prevent the issuer from being saddled with a legally enforceable criminal duty. In a lot of circumstances, a letter of comfort creates a moral criminal duty for the issuer fairly than a prison one.
Companies in most cases do not furnish letters of comfort till utterly necessary. It is because throughout the worst-case situation the company could also be on the hook financially will have to an sudden situation occur. For example, if a subsidiary isn’t in a position to repay a debt, the father or mother company may each be accountable for the entire amount if the letter of comfort was once as soon as poorly worded, or will have to incur pricey prison fees to prove that its letter of comfort was once as soon as not a tacit be sure of its subsidiary’s price criminal duty.
