As a professional, let`s take a look at what a keepwell agreement is and how it affects Moody`s credit ratings.
What is a keepwell agreement?
A keepwell agreement is a contract between a parent company and a subsidiary, where the parent guarantees the debt obligations of its subsidiary. This means that if the subsidiary is unable to meet its debt obligations, the parent company will step in and cover the debt.
What does this have to do with Moody`s?
Moody`s is a credit rating agency that assesses the creditworthiness of companies and governments. When Moody`s evaluates a company`s creditworthiness, it takes into account a variety of factors, including the company`s financial strength, debt obligations, and its ability to repay its debts.
If a subsidiary has a keepwell agreement with its parent company, Moody`s will take this into account when assessing the subsidiary`s creditworthiness. Moody`s will view the subsidiary`s debt obligations as having the support of its parent, which can improve the subsidiary`s credit rating.
Additionally, Moody`s may also take the parent company`s creditworthiness into account when assessing the subsidiary`s creditworthiness. If the parent company has a strong credit rating, Moody`s may view the subsidiary as being less risky to creditors, which can also improve the subsidiary`s credit rating.
However, keepwell agreements can also have a negative impact on a subsidiary`s credit rating if the parent company`s creditworthiness declines. If the parent company is unable to meet its own debt obligations, Moody`s may view the subsidiary as being less likely to receive support from its parent, which can lower the subsidiary`s credit rating.
In conclusion, keepwell agreements play an important role in Moody`s credit rating assessments. While they can help improve a subsidiary`s credit rating, they can also have a negative impact if the parent company`s creditworthiness declines. It is important for companies to carefully consider the potential impact of keepwell agreements on their credit ratings and overall financial stability.