Letter of ComfortExplained & Defined alone with Advantages and Disadvantages

Written By:
Lisa Borga

What Is a Letter of Comfort?

A letter of comfort is a document issued by a company, or often an accounting firm, to provide a degree of assurance to its recipient that a particular party will be able to meet an obligation.

Letters of comfort are most often supplied by external auditors or accountants and are often written in vague terms so as to avoid creating an enforceable legal agreement.

Instead, they are simply written to provide an indication that the party in question will likely be able to meet the terms of a contractual agreement.

These documents are also often known as a letter of intent or a solvency opinion.

These documents have often been traditionally issued in conjunction with a mandatory audit or financial statements filed with a prospectus.

Letter of Comfort Explained

In general, a letter of comfort will often be issued by an auditor or accountant to potential lenders as an opinion regarding a borrower’s ability to make the required payments for a loan.

These are simply the issuing entity’s opinions and not a guarantee that the borrower will remain solvent.

A common type of letter of comfort is one that is attached to copies of a prospectus which is filed alongside an investment offering.

In this case, the document is issued after an audit is performed and provides assurance to the recipients that the prospectus does not include false or misleading information and that future revisions will not lead to any material changes in the offer.

In some cases, letters of comfort may be issued to underwriters by an accounting firm promising to perform reasonable investigations into the offering of securities.

These letters create a commitment for the issuing accounting firm to provide a report which conforms with generally accepted accounting principles.

This will provide the underwriter with additional financial data which may not have been reported, such as access to unaudited financial reports, which may help it to make decisions.

Finally, a common application for letters of comfort is provided by a parent company with respect to its subsidiary.

These are often issued to financial institutions when a subsidiary is attempting to receive a loan or to a subsidiary’s customers or suppliers and, in both cases, seek to provide some degree of assurance to the recipient that the subsidiary is a sound business that is capable of meeting its obligations.

Generally, as with most comfort letters, they are provided without any guarantees however may provide the recipient some assurance that the subsidiary is a sound business.

Advantages and Disadvantages of Letters of Comfort

Advantages of Letters of Comfort

A letter of comfort generally provides no binding provisions on the part of the issuer.

However, they can still be beneficial for the recipient.

A company or individual issuing a letter of comfort places their reputation on the line in supporting the related party.

If the supported party fails to meet its obligations, this can cause great damage to the issuer’s reputation.

As a result, recipients of a letter of comfort may receive some degree of assurance that the relevant obligations will be met.

These letters can also have significant advantages for the party they are attesting to.

If the issuing party has a strong reputation, a letter of comfort can contribute greatly to a company’s ability to acquire credit and financial support.

A letter of comfort can be provided to a bank to show evidence that it is trustworthy, and the lender will often take this into account in making a final decision.

Disadvantages of Letters of Comfort

For recipients and the companies, a letter of comfort presents no significant disadvantage; however, for the issuer, letters of comfort can present some degree of risk.

Though letters of comfort generally contain vague wording and often several disclaimers, they may still be misinterpreted as providing some guarantee.

Because of the risk of poorly wording such a letter and creating a liability should the company default on its obligations, companies are generally reluctant to issue letters of comfort unless it is necessary.

Key Takeaways

• Letters of comfort are business documents intended to reassure a recipient that a party will be able to meet an obligation.
• These letters are often written with vague language in order to avoid creating a binding legal obligation.
• A letter of comfort is often provided in the context of a parent company for its subsidiary in order to assist it in acquiring financial resources.
• Though a letter of comfort generally provides no binding obligation, it does entail placing the reputation of its issuer in jeopardy and thus provides some reassurance.