Letter Of Comfort


DEFINITION of 'Letter Of Comfort'

A letter issued to a lending institution by a parent company acknowledging support of a subsidiary company's attempt for financing. A letter of comfort does not imply that the parent company guarantees repayment of the loan being sought by the subsidiary company. It merely gives reassurance to the lending institution that the parent company is aware of the credit facility being sought by the subsidiary company, and supports its decision.

BREAKING DOWN 'Letter Of Comfort'

A letter of comfort is typically couched in vague wording, in order to prevent the parent company from being saddled with a legally enforceable obligation. As such, a letter of comfort creates a moral obligation for the parent company rather than a legal one. Companies generally do not furnish letters of comfort unless absolutely necessary. This is because in the worst-case scenario, where the subsidiary is unable to repay the debt, the parent company may either be on the hook for the full amount if the letter of comfort was poorly worded, or may have to incur expensive legal fees to prove that its letter of comfort was not a tacit guarantee of its subsidiary's loan.

  1. Creditor

    An entity (person or institution) that extends credit by giving ...
  2. Interest

    1. The charge for the privilege of borrowing money, typically ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Bank

    A financial institution licensed as a receiver of deposits. There ...
  5. Collateralized Loan Obligation ...

    A security backed by a pool of debt, often low-rated corporate ...
  6. European Financial Stability Facility ...

    An organization created by the European Union to provide assistance ...
Related Articles
  1. Insurance

    Are You Protected If Your Insurance Company Goes Belly-Up?

    Consumer protection against insurance company failures actually falls into the hands of state governments. How much protection do you have?
  2. Economics

    What Do Central Counterparty Clearing Houses Do?

    A central counterparty clearing house facilitates trading in European derivatives and equities markets.
  3. Term

    What are Limited Partnerships?

    A limited partnership involves two or more partners conducting a business, but one is only liable for his capital investment. They are also called silent partnerships or limited liability partnerships.
  4. Investing Basics

    What is a Collateralized Loan Obligation?

    A collateralized loan obligation (CLO) is a security consisting of a pool of loans organized by maturity and risk.
  5. Investing Basics

    What is the Shadow Banking System?

    The shadow banking system is composed of financial institutions that do not take deposits in the tradition sense.
  6. Investing

    How Special Purpose Entities Help Fight Risk

    A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
  7. Personal Finance

    Countries With The Largest Shadow Markets

    These nations have the largest informal economies relative to their respective GDPs.
  8. Investing Basics

    Some Thoughts On The Shadow Market

    The "shadow market" is a broad-based moniker with both positive and negative connotations.
  9. Mutual Funds & ETFs

    Investing In Oil And Gas UITs

    Unit investment trusts provide direct exposure to the energy sector, fueling better returns.
  10. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  1. What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Full Answer >>
  2. After Enron, are SPVs / SPEs considered good business practice?

    A special purpose vehicle (SPV), also known as a special purpose entity (SPE), is a separate entity created by a company ... Read Full Answer >>
  3. What role do SPVs / SPEs play in public-private partnerships?

    When created and used in conjunction with a public-private partnership (PPP), a special purpose vehicle (SPV) -- sometimes ... Read Full Answer >>
  4. Is there a limit to the number of SPVs / SPEs a company can create?

    There are no fixed, definable legal limits on the number of affiliate companies that a corporation can create. Special purpose ... Read Full Answer >>
  5. What is the most typical holding in an SPV?

    Special Purpose Vehicles, or SPVs, have been extensively used as a means of securitizing property-based assets. Since the ... Read Full Answer >>
  6. How do businesses decide whether to do FDI via green field investments or acquisitions?

    When businesses decide to expand their operations to another country, one of the more important dilemmas they can face is ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!