Chinese corporates are increasingly providing keepwell and equity interest purchase undertaking deeds - in place of guarantees - in their offshore borrowing, according to a Fitch Ratings report.
Keepwell is an agreement between a parent company and a subsidiary in which the parent company provides a guarantee on the subsidiary's debt for the duration of the agreement. The keepwell agreement reduces the risk to the subsidiary's debt securities and may be beneficial for its stockholders.
As these structures are still evolving, the credit ratings agency (CRA) evaluates the effect of these deeds to the overall debt structure on a case-by-case basis.
In its "Subordination of Chinese Offshore Debt Issues" report, Fitch says it considers, in its recovery analysis, offshore debt as subordinated to all onshore debt for repayment, barring instances where there are guarantees from onshore operating entities. The CRA uses recovery analysis to determine whether to notch the ratings of offshore debt from the issuer's issuer default rating (IDR).
Despite structural subordination, there have been few instances requiring Fitch to notch down offshore debt from the company's IDR. This is due to relatively low financial leverage among rated Chinese corporates. This does not imply, however, that offshore creditors should necessarily expect full recovery in the event of default.