China Keepwell Structures Require Careful Consideration: Moody's

Moody's Investors Service says that the over $12 billion of bonds issued by the offshore subsidiaries of China-incorporated companies and supported by keepwell deeds require careful consideration on a case-by-case basis.


"Bonds with keepwell agreements used to enhance their credit quality carry different risks that need to be individually assessed because of their considerable structural complexity," says Gary Lau, a Managing Director for Moody's Corporate Finance Group.


"Keepwell deeds are not guarantees and are subject to much greater legal and regulatory uncertainty than compared to guarantees. In particular, capital control laws in China heighten the risk that timely payments will not be made, even if keepwell deeds exist," adds Lau.


"As a result, a one-size-fits-all approach to analyzing such structures does not offer sufficient insights to risk."


Moody's analysis of keepwell agreements in China is contained in its just-released report titled "Chinese Corporates: FAQs on Credit-Support Structures in China Using Keepwell Agreements: An Update."


"Treating all keepwell structures as having similar effect, for example, by automatically rating debt at or near the support provider's rating is certainly a simpler approach than our careful analysis of each transaction," says Lau.


"However, such an approach does not properly reflect the structural and other risks involved and therefore does not provide adequate insights to investors," adds Lau.


"Consequently, our analysis focuses on understanding the standalone credit profile of the debt issuer, the benefits of the credit-support structure and the economic and other incentives of the support provider to ensure full and timely payment to bondholders if required."


Nonetheless, Moody's report says because keepwell agreements are an important signal of a parent's willingness to provide support to its offshore subsidiary, the debt issuer's rating is likely to be higher than it would be if its parent company did not provide a keepwell deed.


Moody's has provided ratings to bonds supported by keepwell deeds from 11 China-related issuers, totaling $12.5 billion. Of the 11, 10 have been rated one notch below the ultimate parent and support provider.


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