What is a comfort letter?
A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be fulfilled. In its traditional context, a comfort letter is given to organizations or persons of interest by external auditors regarding statutory audits, declarations and reports used in a prospectus. The comfort letter will be attached to the preliminary statements to guarantee that it will not be materially different from the final version.
Understand the uses of a comfort letter
In practice, auditors often issue comfort letters to lenders as a credit report indicating whether a borrower can meet the payment obligations of a loan. These are opinions, not guarantees, that the underlying company will remain solvent.
Comfort letters may also be issued to the Underwriters as an obligation to conduct a “reasonable investigation” into the securities offers. These comfort letters will ensure that the reports comply with generally accepted accounting principles (GAAP). This helps the subscriber to better understand aspects of financial data that might otherwise go unreported, such as changes to financial statements and unaudited financial reports.
Another major category of comfort letter request is that of the parent company to the subsidiary, through which a parent company can, for example, issue a comfort letter (also known as a residence agreement) on behalf of ” a subsidiary which must borrow from a bank in its location, or provide a letter to a supplier of a subsidiary who wishes to place a large order of raw materials.
A comfort letter is generally formulated in vague language, in order to prevent the issuer from being imposed a legally enforceable obligation.
A comfort letter creates a moral obligation for the issuer rather than a legal obligation.
Companies generally do not provide comfort letters unless absolutely necessary. In the worst case, when the subsidiary is unable to repay the debt, the parent company can either pay the full amount if the comfort letter was poorly worded, or have to pay expensive legal fees. prove that his comfort letter was not a tacit guarantee of the payment obligation of his subsidiary.
Key points to remember
- A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be fulfilled.
- A comfort letter is generally formulated in vague language, in order to prevent the issuer from being imposed a legally enforceable obligation.
- A comfort letter creates a moral obligation rather than a legal obligation.