A keep-well agreement is a contractual agreement often used by lenders to ensure that a borrower has sufficient financial resources to meet their debt obligations. The agreement requires a borrower to maintain a certain level of financial health, such as cash reserves or other assets, in order to reduce the risk of default.
In essence, a keep-well agreement is designed to provide lenders with a level of comfort that the borrower will have the resources necessary to pay back the loan. These agreements are often seen in the context of large corporate loans or bond issuances, where the borrower may have complex financial structures and a wide range of liabilities.
The terms of a keep-well agreement vary widely depending on the specific borrower and lender involved. However, there are some common elements that are typically included in these contracts. For example, the agreement may require the borrower to maintain a certain level of cash or liquid assets, or require the borrower to provide regular financial statements to the lender.
One of the key benefits of a keep-well agreement is that it can provide a level of certainty to lenders that can help reduce the cost of borrowing. By ensuring that the borrower has the resources necessary to meet their obligations, lenders can be more confident in the repayment of the loan, leading to more favorable lending terms and lower interest rates.
However, keep-well agreements also come with certain risks for borrowers. Because these agreements require the borrower to meet certain financial requirements, they can limit the borrower`s ability to use their assets or engage in other financial activities. Additionally, failure to meet the terms of a keep-well agreement can result in default on the loan, which can have serious consequences for the borrower.
Ultimately, keep-well agreements are an important tool for lenders and borrowers alike. While they can provide a level of certainty and reduce the cost of borrowing for borrowers, they also come with certain risks and limitations. Any borrower considering a keep-well agreement should carefully review the terms of the contract and consult with a legal or financial professional to ensure that they fully understand the agreement and its potential impact on their finances.