What ‘Keepwell’ Means With Bonds Like Evergrande’s: QuickTake

A potential restructuring at one of China’s largest, state-run managers of distressed debt -- China Huarong Asset Management Co. -- and fears of a default by the world’s most indebted developer -- China Evergrande Group -- have drawn fresh attention to the labyrinthine structures that Chinese borrowers use to issue and guarantee offshore debt. The so-called keepwell provisions are supposed to protect a foreign bondholder in case the mainland company runs into financial trouble. The problem is the clause essentially amounts to a “gentlemen’s agreement,” and is only starting to be tested in court.

It’s a type of credit protection mainly seen in China’s $850 billion market for dollar bonds (those sold outside mainland China, denominated in U.S. dollars). The keepwell provision often involves a Chinese company’s pledge to keep an offshore subsidiary that is issuing the bonds solvent -- but without any guarantee of payment to the bondholders. (Actual guarantees require regulatory approval but keepwells don’t.) The clauses often include an agreement where the parent will purchase equity interest or assets in the offshore subsidiary as a way of servicing payments on overseas notes, according to an analysis by Fitch Ratings. Terms can vary, with different definitions of default, trigger events or what actions the keepwell provider promises to take.