Department of Finance Comfort Letters

A comfort letter issued by a Department of Finance (typically at a provincial or federal level) is a non-binding statement provided to a lender or other party involved in a transaction, expressing a government’s intent or support for a specific project or entity. These letters are frequently sought in situations where a government entity is closely linked to a borrower or where a project is considered strategically important to the government’s policy objectives.

Purpose and Scope

The primary purpose of a comfort letter is to provide additional assurance to lenders, encouraging them to extend credit or participate in a financing arrangement. While not a guarantee, the letter signals that the government has a vested interest in the success of the project or the financial health of the entity. This can lower the perceived risk and potentially improve the terms of the loan.

It’s crucial to understand the limitations of comfort letters. They generally do not constitute a legal obligation on the part of the government to provide financial support. They are statements of present intention, which can be subject to change based on evolving economic conditions, policy priorities, or budgetary constraints. The specific wording of the letter is paramount; phrases like “the government intends to” or “the government supports” clearly indicate a non-binding commitment. Stronger language suggesting an implicit guarantee is rare and would require significant legal scrutiny.

Common Scenarios

Comfort letters are often used in the following scenarios:

• Financing of Public-Private Partnerships (PPPs): Governments may issue comfort letters to reassure lenders involved in infrastructure projects undertaken through PPPs. The letter may outline the government’s commitment to the overall project and its intention to honor its contractual obligations.
• Support for Crown Corporations or Agencies: When a Crown corporation seeks financing, a comfort letter can signal the government’s continued support, even without a direct guarantee. This can be crucial for securing favorable borrowing rates.
• Projects of Strategic Importance: In instances where a project is deemed vital to the local or national economy (e.g., energy projects, manufacturing facilities), a government might issue a comfort letter to attract investment and facilitate financing.
• Stabilizing Financial Institutions: In times of economic stress, governments may issue comfort letters to bolster confidence in specific financial institutions. These letters are typically carefully worded to avoid creating a moral hazard.

Key Considerations

When evaluating a comfort letter, lenders should consider the following:

• The Wording of the Letter: Careful analysis is required to understand the exact nature of the government’s commitment. Vague or ambiguous language should be treated with caution.
• The Creditworthiness of the Government: The value of a comfort letter is directly tied to the financial stability and reputation of the issuing government.
• The Political Risk: Changes in government or policy priorities can impact the government’s willingness to honor the intentions expressed in the letter.
• Legal Advice: Lenders should consult with legal counsel to fully understand the legal implications of relying on a comfort letter.

In conclusion, Department of Finance comfort letters provide a degree of assurance to lenders but should not be viewed as guarantees. They are valuable indicators of government support but must be carefully assessed in conjunction with other risk factors and sound due diligence.