Keepwell Agreement Bonds

A Keepwell agreement determines how long the parent company will guarantee the financing of the subsidiary. This type of contract helps the subsidiary with the lenders. In other words, lenders are more likely to lend to the subsidiary if it has a Keepwell agreement. The restructuring manager of the state-appointed Peking University`s founding group refused to acknowledge, following a meeting of creditors at the end of April 2020, receivables worth about $1.7 billion as valid receivables, allegedly loans for debts worth $96 billion, according to the law firm Simmons and Simmons. This is a type of credit protection that is mainly seen in the Chinese market of $791 billion of dollar bonds (sold outside mainland China, in U.S. dollars). Keepwell`s regime often involves a Chinese company`s commitment to keep an offshore subsidiary on the ground that issues bonds -- but without guarantee of payment to bondholders. (Actual guarantees must be subject to administration authorization, but keepwell is not).) The clauses often contain an agreement in which the parent company will purchase equity units or assets in the offshore subsidiary to serve payments on foreign bonds, as shown by an analysis by Fitch Ratings. Terms may vary, with different definitions of the standard, trigger events or what actions the Keepwell provider promises to take. Chinese companies began using Keepwell`s structure about seven years ago to allay skittish foreign investors` concerns about the solvency of a bond issuer. They became increasingly popular as Beijing policymakers adopted a more market-oriented business approach and increased corporate bond defaults. In 2017, the national foreign exchange authority, a market watchdog, adopted new rules on guarantees that allowed domestic companies to return money raised through offshore bonds.

However, according to China International Capital Corporation, an investment bank, some Chinese issuers have maintained Keepwell`s structure because revenue usage rules are more flexible and regulatory approvals are even less necessary. The subsidiaries enter into Keepwell agreements to increase the solvency of debt securities and business loans. A Keepwell agreement is a contract between a parent company and its subsidiary, in which the parent company provides a written guarantee for maintaining the subsidiary`s solvent and health capacity, maintaining certain financial ratios or capital levels.