Keepwell Agreement: Its Mechanics And A Real-Life Example

Mechanics of Keepwell Agreement

Mechanics of Keepwell Agreement

A Keepwell Agreement is a contractual arrangement between two parties, typically a parent company and its subsidiary or an investor and a company, that provides financial support and assurance to the weaker party. It is designed to enhance the creditworthiness of the weaker party and provide confidence to lenders and investors.

Key Components

Key Components

A Keepwell Agreement typically includes the following key components:

  1. Keepwell Provision: This provision outlines the commitment of the stronger party to provide financial support to the weaker party in case of financial distress or inability to meet its obligations. It serves as a guarantee or assurance to lenders and investors.
  2. Financial Support: The Keepwell Agreement specifies the nature and extent of financial support that the stronger party is obligated to provide. This can include capital injections, loans, guarantees, or other forms of assistance.
  3. Conditions: The agreement may outline certain conditions under which the financial support will be provided. These conditions can include the weaker party’s compliance with certain financial ratios, performance targets, or other requirements.
  4. Term: The Keepwell Agreement specifies the duration of the commitment, which can be for a fixed period or until certain conditions are met.

Benefits and Risks

The Mechanics of a Keepwell Agreement provide several benefits to the weaker party. Firstly, it enhances the creditworthiness of the weaker party, making it more attractive to lenders and investors. This can result in improved access to financing and lower borrowing costs.

Secondly, the agreement provides a safety net for the weaker party in case of financial distress. The stronger party’s commitment to provide financial support can help stabilize the weaker party’s operations and prevent default on its obligations.

Overall, the Mechanics of a Keepwell Agreement play a crucial role in providing financial support and assurance to the weaker party, while also introducing certain risks that need to be carefully managed.

Real-life Example of Keepwell Agreement

A keepwell agreement is a financial instrument that provides support to a subsidiary or affiliate company by its parent company. It ensures that the subsidiary has access to financial resources and support in case of financial distress. One real-life example of a keepwell agreement is the agreement between Alibaba Group and its subsidiary, Alibaba Pictures.

In 2015, Alibaba Group, a Chinese multinational conglomerate specializing in e-commerce, entered into a keepwell agreement with Alibaba Pictures, its subsidiary engaged in the entertainment industry. The purpose of the agreement was to provide financial support and stability to Alibaba Pictures, ensuring its continued operations and growth.

Under the keepwell agreement, Alibaba Group committed to providing financial resources to Alibaba Pictures in case of any financial difficulties. This support could be in the form of loans, capital injections, or other financial assistance. The agreement also specified that Alibaba Group would take necessary measures to ensure that Alibaba Pictures remains solvent and financially stable.

Furthermore, the keepwell agreement also provided a framework for ongoing financial support and collaboration between Alibaba Group and Alibaba Pictures. It allowed for the sharing of resources, expertise, and opportunities, fostering a mutually beneficial relationship between the two companies.