Letter of Comfort

What is a Letter of Comfort?

A Letter of Comfort (LoC) is an informal document issued by a parent company to a bank or financial institution. It serves to support the financial applications of its subsidiary, primarily when the subsidiary seeks a loan. The LoC offers a non-binding assurance that the parent company is aware of the subsidiary’s loan intention and typically indicates the parent company’s intention to support the subsidiary. Critically, it does not provide a legally enforceable guarantee of loan repayment. Instead, it reassures the bank that the parent company will notify it of any significant changes that might affect the subsidiary’s business continuity.

Key Characteristics:

1. Non-Binding Nature: Unlike a guarantee, a Letter of Comfort does not legally obligate the parent company to repay the loan if the subsidiary defaults.
2. Support and Assurance: It conveys that the parent company acknowledges the subsidiary’s borrowing intentions and supports their business endeavors.
3. Communication of Changes: The parent company typically agrees to notify the financial institution of any major changes that may affect the subsidiary’s stability or ownership.

Examples of a Letter of Comfort

1. Example 1:

   To: [Bank Name]
   Address: [Bank Address]
   Date: [Date]
   
   Subject: Letter of Comfort for [Subsidiary Name]
   
   Dear Sir/Madam,
   
   This letter serves to confirm that [Parent Company Name] is aware of [Subsidiary Name]'s intention to apply for a loan from your institution. We express our support for this financial application. While this letter does not constitute a guarantee of repayment, we are in full knowledge of the borrowing and support [Subsidiary Name]'s continued business activities. Should any material changes occur affecting the subsidiary's operations or ownership, we will notify you promptly.
   
   Sincerely,
   
   [Name]
   [Title]
   [Parent Company Name]
   

2. Example 2:

   To: [Financial Institution Name]
   Address: [Institution Address]
   Date: [Date]
   
   Subject: Comfort Letter
   
   Dear [Recipient Name],
   
   This letter serves to provide comfort with respect to the banking facilities extended to our subsidiary, [Subsidiary Name]. While this letter does not represent a repayment guarantee, [Parent Company Name] acknowledges and supports the financial obligations under consideration. Any significant changes in the ownership or operation of [Subsidiary Name] will be promptly communicated to your office.
   
   Yours faithfully,
   
   [Name]
   [Position]
   [Parent Company Name]
   

Frequently Asked Questions about Letters of Comfort

1. What is the primary purpose of a LoC?

• The primary purpose of a Letter of Comfort is to provide reassurance to a lender that the subsidiary seeking the loan has the awareness and backing of its parent company, although it stops short of guaranteeing repayment.

2. Does a Letter of Comfort create any legal obligations?

• No, a Letter of Comfort does not create legal obligations for the parent company to repay the loan. It is an informal document that offers assurance without a binding commitment.

3. Can a LoC influence a bank’s decision to grant a loan?

• Yes, while it is not a legally binding guarantee, a Letter of Comfort can positively influence a bank’s decision by providing additional assurance regarding the stability and support for the subsidiary.

4. Is a Letter of Comfort the same as a Letter of Guarantee?

• No, a Letter of Guarantee is a legally binding commitment to repay the loan if the borrower defaults, whereas a Letter of Comfort is non-binding and does not ensure loan repayment.

5. What should be included in a LoC?

• A LoC typically includes acknowledgment of the borrowing intent, the parent company’s support or awareness, and an assurance to notify the lender of any significant changes affecting the subsidiary.

Related Terms

• Letter of Awareness (LoA): An informal letter indicating the parent company’s awareness of the subsidiary’s business activities but not offering any guarantee or comfort.
• Letter of Guarantee: A document whereby the guarantor promises to cover the borrower’s debt obligations in case of default, creating a binding obligation.
• Subsidiary: A company controlled by another (parent) company, often through majority ownership of its stock.
• Parent Company: A firm that owns or controls a subsidiary, typically holding a majority stake.

Online References

• Investopedia: Letter of Comfort
• Corporate Finance Institute (CFI): Letter of Comfort Guide
• Funding Universe: Letter of Comfort Definition

Suggested Books for Further Studies

1. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
2. “Financial Accounting Theory” by William Scott and Patricia O’Brien
3. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen

Accounting Basics: “Letter of Comfort” Fundamentals Quiz

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