What is a Keepwell Agreement?
How Does a Keepwell Agreement Work?
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 to build a factory. It wants to borrow the 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 step in and make sure the loan payments are made.