What Is A Keepwell Agreement

In order to keep production on track and keep the interest rate on the loan as low as possible, Computer Parts Inc. may enter into a Keepwell agreement with its parent company Laptop International to guarantee its financial solvency during the term of the loan. In early November, a court in mainland China effectively recognized for the first time creditors` claims on the offshore bonds of a Chinese defaulter relating to a Keepwell provision. The order in the case of CEFC Shanghai International Group Ltd. could serve as a precedent for others in similar difficulty, including Peking University Founder Group Corp. This sprawling conglomerate of medical and internet companies began a court-led debt restructuring in February. 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 filed a lawsuit abroad after the head of restructuring of the founding group rejected their claims for recognition of claims from five Keepwell bonds in August. Not only banks and other lenders, but also suppliers offer rather favorable conditions. If the subsidiary wants a 90-day period and there is no Keepwell agreement, the supplier is less likely to accept. It is less likely to be approved if the subsidiary has a poor credit history or if it is a new customer.

A Keepwell agreement is an agreement between a parent company and its subsidiary to maintain solvency and financial support throughout the term set out in the agreement. Keepwell chords are also known as letters of good bedding. This is a type of credit protection that is mainly seen in the Chinese $791 billion dollar bond market (those sold outside mainland China are denominated in US dollars). The Keepwell provision often involves a commitment by a Chinese company to maintain an offshore subsidiary that issues the solvent bonds – but without a guarantee of payment to the bondholders. (Actual warranties require regulatory approval, but not Keepwells.) The clauses often include an agreement in which the parent company acquires shares or assets in the offshore subsidiary to serve foreign debt payments, according to an analysis by Fitch Ratings. Terms can vary, with different definitions of the standard, triggering events, or actions the keepwell provider promises to take. We can write the term as two or three words, i.e. either Keepwell Agreement or Good Agreement. Keepwell agreements place trust not only on lenders, but also on shareholders, bondholders and suppliers of a subsidiary. 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 have become increasingly popular as policymakers in Beijing have taken a more business-oriented approach and increased corporate bond defaults. In 2017, the State Administration of Foreign Exchange, a market regulator, issued new rules on collateral that made it easier for domestic companies to bring home funds raised in cash from offshore bonds.


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