Keepwell: Overview, definition, and example
What is a keepwell agreement?
A keepwell agreement is a contractual commitment in which a parent company or financially stronger entity agrees to provide financial support to a subsidiary or affiliated company to help maintain its financial stability. This type of agreement is often used to reassure lenders or investors that the supported entity will have the necessary resources to meet its obligations.
For example, a multinational corporation might enter into a keepwell agreement with its subsidiary to ensure the subsidiary remains financially sound while securing a loan.
Why is a keepwell agreement important?
A keepwell agreement is important because it provides financial assurance to creditors, investors, and business partners. By guaranteeing support, the agreement can help a subsidiary or weaker entity secure financing at better terms and maintain confidence in its operations.
For businesses, a keepwell agreement can be a strategic tool to strengthen financial credibility without creating a direct guarantee of debt repayment. However, because a keepwell agreement does not always create a legal obligation to provide funds, its enforceability depends on how it is structured and applicable laws.
Understanding a keepwell agreement through an example
Imagine a bank is considering lending money to a startup that is owned by a large parent company. To provide reassurance, the parent company signs a keepwell agreement stating that it will provide financial support to the startup if needed. As a result, the bank is more willing to approve the loan, knowing the startup has financial backing.
In another example, a publicly traded company with an overseas subsidiary wants to issue bonds in the subsidiary’s name. Investors may hesitate due to concerns about the subsidiary’s financial strength. To address this, the parent company enters into a keepwell agreement, committing to maintaining the subsidiary’s net worth above a certain level, helping the subsidiary attract investors.
An example of a keepwell agreement clause
Here’s how a keepwell clause might appear in a contract:
“The Parent Company agrees to use its reasonable efforts to ensure that the Subsidiary maintains sufficient financial resources to meet its obligations under this Agreement. This Keepwell Agreement shall not constitute a direct guarantee but serves as a commitment to provide financial support as necessary.”
Conclusion
A keepwell agreement is a valuable financial tool that helps businesses maintain stability and build confidence among creditors and investors. For companies seeking financing, it can improve creditworthiness without the need for direct guarantees. While not always legally binding as a debt guarantee, a well-structured keepwell agreement can serve as a strong commitment to financial support, benefiting all parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.