A letter of comfort is a letter issued by a parent company to a bank acknowledging support of a subsidiary’s attempt to raise finance.

What does a letter of comfort do?

A letter of comfort gives reassurance to the bank that the parent company is aware of the credit facility being sought and supports the subsidiary's decision to do so. It’s important to note that a letter of comfort is not intended to provide a guarantee of a subsidiary’s loan obligation.

Why would a bank seek a letter of comfort?

Letters of comfort are typically vague in their language in order to protect against any legally enforceable obligation. It can be argued that they create a “moral” obligation for the parent company regarding a subsidiaries debt. In general, parent companies tend to be uneasy issuing letters of comfort due to their legal ambiguity. For instance a perceived risk might be that if the document is poorly worded from a legal perspective, it could be judged to create an implied guarantee.

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