Keepwell Agreement
Candlefocus EditorThe purpose of a keepwell agreement is to help companies manage their credit risks while providing assurance to its creditors that they will be paid in full. In general, it is used when a company is at risk of defaulting on its debt obligations. It is a promise by the company to take necessary steps to ensure that it can fulfill its financial obligations, such as keeping its cash flow at an acceptable level and maintaining its liquidity.
Typically, a keepwell agreement is an agreement between a company and its lenders, creditors, and bondholders. It commits a company to maintaining financial health and actively manage its credit risk. The company agrees to take specific steps for this purpose, including (but not limited to) providing timely financial information, maintaining minimum liquidity, and maintaining a certain level of profitability. As part of the agreement, the company pledges certain assets as security for its debt or makes other binding commitments.
Keepwell agreements can be beneficial for lenders, creditors, and bondholders because it reduces their risk of defaulting or non-payment. It provides assurance that their investments are safe and increase their confidence in the company.
At the same time, a keepwell agreement can be beneficial for a company. By making a commitment to maintain a certain level of financial health, a company can improve its creditworthiness, helping it to secure additional loans at lower interest rates and access better financing terms. This can help a company to establish credibility and access capital needed to expand its operations.
In conclusion, a keepwell agreement is a contractual arrangement between a company and its debt holders that helps a company to maintain its financial health and creditworthiness. It can be beneficial for both lenders and companies and help a company to access needed capital to expand its business.