A Keepwell agreement can also be developed to improve the credit of a loan. If a subsidiary does not make bond payments, the loan administrators may apply the agreement in the interest of the bondholders. The parent company assumes responsibility for keeping the subsidiary in good financial health. Subsequently, the chances of success in China are much greater thanks to the Keepwell agreement. In order to keep production on track and keep the loan interest rate as low as possible, Computer Parts Inc. may enter into a Keepwell agreement with its parent company, Laptop International, to secure its financial solvency for the duration of the loan. Therefore, auditors should verify the language of the Keepwell agreement and attempt to determine potential liabilities that are not disclosed in the financial statements where there is a De Keepwell agreement. Information on potential liabilities related to the agreement can be obtained from management and third parties. investinganswers.com/financial-dictionary/…/keepwell-agreement-5594 A Keepwell agreement, however, is the result of negotiations prior to its creation, and is generally more vague and less specific than traditional legal obligations. There is no guarantee that such an agreement will be implemented, as it cannot be invoked legally. Keepwell Bond Issue Remains Strong Despite Uncertainties The document is generally for a fixed period of time, based on what has been agreed between the two parties. This means that, if the contract is active, the parent company continues to guarantee the principal payment obligation and interest of the subsidiary.
Therefore, when the subsidiary is in solvency problems, its shareholders and lenders are covered by the parent company. A Keepwell agreement is an agreement between a parent company and one of its subsidiaries. The parent company is committed to covering all of the subsidiary`s financing needs. To compensate for this, abC and XYZ sign a 10-year keepwell agreement. In the agreement, ABC is committed to keeping XYZ solvent and financially stable for the next 10 years. This is a relief for the bank, which now knows that when XYZ companies stumble into China`s efforts, abc company will step in and make sure that credit payments are made. The warranty time set depends on what both parties agreed upon when the contract was concluded. As long as the duration of Keepwell`s contract is still active, the parent company guarantees all interest payments and/or repayment obligations of the subsidiary. When the subsidiary is in solvency problems, its bondholders and lenders have made sufficient use of the parent company.