Legal Definitions - letter of comfort

A letter of comfort (also known as a comfort letter) is a document issued by one party to another, typically a lender or business partner, to provide a degree of assurance regarding the financial standing or future actions of a third party. Unlike a formal guarantee, a letter of comfort is generally not legally binding and does not create a direct contractual obligation for the issuer to pay if the third party defaults. Instead, it offers a moral, commercial, or ethical commitment, aiming to reduce the recipient's perceived risk and facilitate a transaction, such as a loan or contract, without taking on full legal liability.

Here are some examples illustrating the use of a letter of comfort:

• Example 1: Parent Company and Subsidiary Loan

  A large multinational corporation wants its newly established subsidiary to secure a bank loan for expansion into a new market. The subsidiary, being new, has limited assets and a short credit history. The bank is hesitant to lend the full amount without additional assurance. The parent company issues a letter of comfort to the bank, stating its intention to maintain its ownership stake in the subsidiary and ensure the subsidiary remains financially viable. The letter explicitly avoids creating a direct legal guarantee for the loan repayment. This assurance helps the subsidiary secure the loan, as the bank feels more confident due to the parent company's stated commitment, even if it's not legally enforceable as a guarantee.

• Example 2: Government Project Funding

  A private engineering firm is bidding on a multi-year public infrastructure project that requires significant upfront investment. The government agency overseeing the project has secured funding for the initial phase but needs parliamentary approval for subsequent phases, which could take time. To help the engineering firm secure financing from its own bank for the initial investment, the government agency issues a letter of comfort. This letter expresses the agency's strong intention and expectation that future funding will be approved and allocated for the project's completion, even though it cannot legally commit to future appropriations. This non-binding assurance helps the engineering firm's bank evaluate the project's long-term viability.

• Example 3: Supplier Relationship Assurance

  A small, innovative technology startup has developed a unique component that a major electronics manufacturer is interested in incorporating into its next product line. The startup needs to invest heavily in new machinery and increase its production capacity to meet the potential demand. The manufacturer, while keen on the component, is not yet ready to sign a long-term purchase agreement due to ongoing product development. To help the startup secure a loan for its expansion, the manufacturer provides a letter of comfort to the startup's bank. This letter indicates the manufacturer's strong interest in a long-term supply relationship and its intention to place substantial orders once its product development is complete, without legally committing to specific quantities or prices. This provides the bank with a degree of confidence in the startup's future revenue potential.