Letter Of Comfort

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Creditor

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

    The act of giving money, property or other material goods to ...
  3. Interest

    1. The charge for the privilege of borrowing money, typically ...
  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 FAQS
  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 >>
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. 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.
  3. Personal Finance

    Countries With The Largest Shadow Markets

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

    Some Thoughts On The Shadow Market

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

    Investing In Oil And Gas UITs

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

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  7. Taxes

    The Basics Of REIT Taxation

    The unique tax advantages offered by these investments can translate into superior yields.
  8. Home & Auto

    3 Types Of REITs For Your Portfolio

    Learn the key features of three subcategories of equity REITs: industrial, multifamily and hotel REITs.
  9. Personal Finance

    The Enron Collapse: A Look Back

    This was one of the most complex bankruptcies in U.S. history. Ten years later, we look back at what happened and how it permanently impacted the financial markets.
  10. Options & Futures

    The Benefits Of ETF Investing

    Exchange-traded funds provide unique opportunities for investors. Find out how.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center