A keepwell agreement is a financial contract between a parent company and its subsidiary, designed to ensure that the subsidiary has enough financial support to meet its financial obligations. This agreement is often used in international investments, where the parent company is based in a different country from the subsidiary.
The keepwell agreement is essentially a promise from the parent company to provide financial assistance to the subsidiary in case of financial distress, such as a credit crisis or bankruptcy. This assistance can come in the form of a loan, capital injection, or any other financial support that the subsidiary might require to stay afloat.
One of the primary purposes of a keepwell agreement is to provide additional assurance to creditors and investors that the subsidiary is financially stable and has the backing of the parent company. This can be particularly important for subsidiaries operating in high-risk industries or countries where there may be greater financial instability.
Keepwell agreements are typically negotiated as part of the overall investment agreement between the parent company and the subsidiary. The terms of the agreement can vary depending on the specific needs of the parties involved, but they typically include provisions for the amount and timing of financial support, as well as any restrictions or conditions on how the funds can be used.
From an operational standpoint, keepwell agreements can be a valuable tool for multinational corporations looking to expand their operations overseas. By providing a financial safety net for their subsidiaries, they can reduce the risk of financial disruption and help ensure that their investments are successful over the long term.
Overall, a keepwell agreement is an important financial instrument for multinational corporations and their subsidiaries. By providing a guarantee of financial support when it is needed most, these agreements can help to mitigate financial risk and ensure the long-term success of international investments.
