Why keepwell agreement matters to a first-time founder
Creditors may take comfort from a parent’s promise to maintain a subsidiary’s liquidity or ownership, which can improve financing terms. The protection is weaker and less direct than a guarantee. Founders relying on one must understand exactly what support is promised, who can enforce it and which country’s law governs.
Examples of keepwell agreement
A parent company signs a keepwell agreement stating that its financing subsidiary will maintain positive net assets while ₦20 billion of bonds remain outstanding. The subsidiary later misses interest. Bondholders cannot assume the parent must pay the coupon; they must examine the promised support, enforcement rights and applicable court decisions.
Common misunderstanding
A keepwell agreement is not automatically a guarantee. A guarantee normally creates a direct obligation to pay when the principal debtor fails, while a keepwell promise may require only specified support or financial conditions. Its enforceability can also depend on approvals, wording, governing law and cross-border insolvency rules.
When to use it
Use one only after lenders, the parent and subsidiary agree what support is commercially and legally achievable. Define financial tests, duration, information rights, enforcement and termination precisely. Cross-border groups should obtain specialist advice on corporate authority, foreign-exchange controls and insolvency, rather than treating the document as guaranteed credit protection.