What is a Letter Of Moral Intent
A letter of moral intent is written to a bank from a parent company whose subsidiary is applying to borrow money from that bank. The purpose of the letter is to encourage the bank to lend money to the subsidiary. The letter is especially helpful in cases where the parent company is providing a significant amount of financial support to the subsidiary. While not legally binding, the letter indicates the parent company's intention to continue financially supporting its subsidiary (to not sell it or shut it down) in an attempt to reassure the lender that making the loan would not be an overly risky decision.
BREAKING DOWN Letter Of Moral Intent
A letter of moral intent is written by a parent whose subsidiary is attempting to borrow money from a bank. The letter reassures the bank that the parent will continue to financially support the subsidiary during the course of the loan. While a letter of moral intent serves as reassurance to a bank that a parent company is on-side with a loan application, it does not serve as a formal guarantee by the parent for the subsidiary. This letter also shows that the parent company is aware of its subsidiary having requested the loan and approves.
Example of a Situation Requiring a Letter of Moral Intent
For example, XYZ Company is the parent of ABC Subsidiary. ABC Subsidiary's business has been struggling and XYZ Company has been providing a lot of financial support. ABC Subsidiary has decided that it would become a more competitive entity if it had more funding to develop its new product, so it applies for a loan. Since ABC Subsidiary's financials are not stable, XYZ Company sends a letter of moral intent to the bank stating that they intend to continue to financially support ABC Subsidiary.