Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Keepwell Agreement

What it is:

A keepwell agreement is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability for the duration of the agreement.

How it works (Example):

For example, let's assume that Company XYZ is a subsidiary of Company ABC. Company XYZ has had a tough year making widgets but wants to expand into the Chinese markets and needs cash to build a factory. It wants to borrow the money from a bank but is a significant lending risk and can't get a loan for less than 15% interest. At that rate, the loan payments would significantly threaten Company XYZ's viability.

To compensate for this, Company ABC and Company XYZ sign a 10-year keepwell agreement. In the agreement, Company ABC agrees to keep Company XYZ solvent and financially stable for the next 10 years. This is a relief to the bank, which now knows that if Company XYZ stumbles in the China endeavor, Company ABC will step in and make sure the loan payments are made.

Why it Matters:

Keepwell agreements benefit bondholders because they essentially guarantee that a parent company will bail out a subsidiary if the subsidiary gets into financial trouble. This makes the subsidiary more creditworthy and thus able to issue debt or borrow money more easily.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...