China Keepwell Agreements Fade

Bloombger: Don't Pay for Comfort
Keepwell agreements weren't invented in China, but they've become popular there since 2012, when Gemdale, a developer, sold a large offshore yuan bond with this enhancement.

The agreements say, broadly, that the onshore parent will make every effort to keep the special-purpose vehicle that issued the bonds solvent. They are no more than letters of comfort. At most, they entitle creditors to accelerate the bonds in certain circumstances, but carry no weight in a Chinese court in case of bankruptcy. They owe their existence to the difficulties companies face sending money home that was raised overseas as debt.

The State Administration of Foreign Exchange used to allow companies to repatriate funds from IOUs chiefly through equity injections or shareholder loans. So Chinese corporations created holding structures to enable special-purpose vehicles based in the Cayman Islands, for example, to sell bonds and then send the money to the real owner in Shanghai or Shenzhen. Last week, SAFE called an end to that, announcing that all money raised from offshore bonds can be sent home.

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