Moody`s issued bonds backed by Keepwell shares of 11 China-related issuers, for a total of $12.5 billion. Of the 11, 10 were rated below the ultimate parent and support provider. In early November, a court in mainland China effectively recognized for the first time creditors` claims on the offshore bonds of a Chinese latecomer, secured by a Keepwell provision. The injunction in the case of CEFC Shanghai International Group Ltd. could set a precedent for others in similar difficulties, including beijing founder corp.`s group of universities. This vast conglomerate with medical and internet companies entered in February into a judicial restructuring of the debt. Many of the bonds sold by their foreign subsidiaries had a Keepwell supply, and the people who bought them are now trying to get their money back. Some of these bondholders have filed a lawsuit abroad after founder Group`s restructuring administrator rejected their claims for recognition of claims on five Keepwell bonds in August. According to the Fitch report, nearly US$100 billion of offshore bonds issued by Chinese companies contain Keepwell provisions. The Keepwell Act is a contract between a parent company and its subsidiary, in which the parent company gives a written guarantee to keep the subsidiary solvent and in good financial health by maintaining certain financial ratios or levels of equity.

This instrument is different from a bond guarantee, as it only allows creditors to force the credit provider to supplement the issuer`s liquidity for debt repayment instead of paying the debt directly. The eipu`s actions complement keepwell. Under this type of agreement, the parent company acquires the assets of the offshore issuer and its onshore subsidiary in order to cover any obligations of the offshore issuer in the face of a risk of default. Chinese companies began using the Keepwell structure about seven years ago to allay concerns from skeptical foreign investors about the creditworthiness of a bond issuer. They became increasingly popular as policymakers in Beijing took a more market-oriented approach and increased corporate bond losses. In 2017, the State Administration of Foreign Exchange, a market surveillance authority, adopted new rules on collateral that made it easier for domestic companies to repatriate cash funds from offshore bonds. However, according to China International Capital Corporation, an investment bank, some Chinese issuers have maintained the Keepwell structure, as the rules for using revenues are more flexible and administrative permissions are even less necessary. “Keepwell acts are not guarantees and are subject to much greater legal and regulatory uncertainty than guarantees. In particular, China`s capital control laws increase the risk that payments will not be made in a timely manner, even if there are benefits,” Lau adds. Moody`s said on June 17 that it valued bonds with the Keepwell Deed issued by 38 offshore subsidiaries of Chinese companies. (Reports by Samuel Shen and Brenda Goh; Nevertheless, the Moody`s report says that because the De Keepwell agreements are an important signal for a parent company`s willingness to support its offshore subsidiary, the debt issuer`s rating will likely be higher than if its parent company did not present a Keepwell deed.

In a report on Monday, Moody`s said that, as part of the ongoing restructuring, it was not yet clear whether the court would recognize these well-covered bonds as debt obligations of Beijing Founder, the instrument provider. Moody`s Investors Service says bonds worth more than $12 billion issued by offshore subsidiaries of Chinese companies and backed by Keepwell documents need to be carefully considered on a case-by-case basis. This is a kind of credit protection that is mainly seen in the Chinese market of $791 billion in dollar bonds (those sold outside mainland China and denominated in the United States). . . .