Why would creditors accept a legally UNenforceable comfort letter, from borrowers who can't guarantee?

[joel2]

Richard Taylor, Damian Taylor. Contract Law Directions (6 edn, 2019). p 65. Para 1.

You might be wondering why businessmen bother to make an agreement
if it has no legal effect—is it worth the paper it is written on? [mine] In banking practice ‘comfort
letters’ are used literally; they provide comfort to a lender that he will get his money back. A
borrower’s parent company (i.e. its main shareholder) will usually be saying something along
the lines of ‘we will try to be a really good parent company and make sure that our subsidiary
pays all your money back’. The bank does not expect to be able to sue on this agreement, and
should insist on receiving a guarantee if it wants to have legally enforceable rights against the
parent company.

In Kleinwort Benson Ltd v Malaysia Mining Corp. (1989) the following wording in a comfort
letter was held not to contain an intention to create legal relations: ‘It is our policy to ensure
that the business of [our subsidiary] is at all times in a position to meet its liabilities to you under
the above arrangements.’ Companies must be careful not to promise to ‘guarantee’ or ‘undertake’
to do anything as this is more likely to be interpreted as a binding agreement.

I'm not swayed by Shawn Goldmintz's (BBA York, JD Windsor) article.

It may seem as though comfort letters have the potential to be absolutely useless in certain circumstances. The question begs as to why a creditor would accept a comfort letter from a guarantor that refuses to give a guarantee when the letter cannot be enforced at law. The commercial reality is that when a business fails to meet its obligations, whether as a matter of law or honour, it reflects poorly on that business. A bad reputation can be much worse for a company than having to repay a loan. While this may not seem like an appropriately harsh punishment for one who fails to honour a non-contractual version of a guarantee, it should be remembered that, unfailingly, the author of a comfort letter will have been asked for a guarantee first, and the author refused.

In addition to this weak punishment, it is entirely possible, and in fact probable, that some comfort letters will be interpreted as binding legal obligations in the future. All it would take is for the wording of a letter to indicate promissory intent (perhaps by using the future tense), and the letter would be held to create legally binding obligations.

I'm asking just about comfort letters that aren't legally enforceable. You can disregard last para. above.

If I were the lending officer at an elite bank, I'd distrust any borrower that can't guarantee! I wouldn't lend to it. After all, why wouldn't I just stick to lending to borrowers who can guarantee?

1. The emboldened quote doesn't feel true to me. Any examples? To the lender, "a bad reputation" won't get her his money back, and feels useless.
2. Are there other reasons?

 

[blake1023]

@joel2 A business would get a CPA to write one on their behalf. It's not the business's reputation at stake. It's the professional who wrote the opinion.

 

[junohannah]

@joel2 The creditor would look at an array of factors in making the lending decision. The comfort letter would be a minor plus point, but will most likely be ignored if other fundamentals do not match up. But it may help a borderline decision go in favour of lending.

 

[saidative]

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