Asia Fixed Income Analyst

Derek Silva

Credit

<p>Since their introduction less than a decade ago, there has been much discussion and little evidence about the enforceability of the ‘keepwell’ deed in many Chinese USD corporate bonds. And, given that the biggest issuer of keepwell bonds in 2020 is Evergrande’s Hengda Real Estate, it remains as relevant as ever. Until recently, the structure had yet to be put to the test in any prominent distressed cases.  </p><p>A high-profile case in 2020 seemed to have changed that. In recent months, investors and analysts have closely followed the situation with PKFounder, a distressed issuer with a keepwell bond. And it didn’t look good for keepwell bondholders: The<a href="https://www.reuters.com/article/china-bond-keepwell/administrator-for-chinas-pufg-rejects-keepwell-deed-for-300-mln-bond-redd-idINL4N2FP01J" target="_blank" rel="noopener"> judgement rejected the bondholders' claims</a>, seemingly solidifying the argument for those who said the structure was little more than a gentleman’s agreement and provided a false sense of security.  </p><p>But now there’s been a new legal decision from a smaller case that contradicts the PKFounder decision. Which brings to mind something important to remember: the concept of <em>legal precedent</em> is not as powerful in China as it is elsewhere. In the other case, Mainland company CEFC had an offshore subsidiary which also issued keepwell bonds and, this month, the Shanghai Financial Court ordered the company to pay a bondholder on account of the keepwell deed. </p><p>In the following sections, we take a closer look at the specifics. And, while there is no firm conclusion about the enforceability of a keepwell deed, the latest news shows that the situation is not cut-and-dry and the keepwell feature in bonds might not be worthless after all.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/416/original/Screenshot%202020-11-14%20at%2011.21.07.png?1605330171" class="editor-image img-responsive" data-smartkarma-image-id="171416"></figure><div class="content-caption">Source: https://events.debtwire.com/apchart-of-the-week-keepwells-back-19-of-chinese-hy-bonds-ytd-while-pkfounder-cefc-bring-structure-on-focus</div></section><p></p></section>

Since their introduction less than a decade ago, there has been much discussion and little evidence about the enforceability of the ‘keepwell’ deed in many Chinese USD corporate bonds. And, given that the biggest issuer of keepwell bonds in 2020 is Evergrande’s Hengda Real Estate, it remains as relevant as ever. Until recently, the structure had yet to be put to the test in any prominent distressed cases.  A high-profile case in 2020 seemed to have changed that. In recent months, investors and analysts have closely followed the situation with PKFounder, a distressed issuer with a keepwell bond. And it didn’t look good for keepwell bondholders: The judgement rejected the bondholders' claims, seemingly solidifying the argument for those who said the structure was little more than a gentleman’s agreement and provided a false sense of security.  But now there’s been a new legal decision from a smaller case that contradicts the PKFounder decision. Which brings to mind something important to remember: the concept of legal precedent is not as powerful in China as it is elsewhere. In the other case, Mainland company CEFC had an offshore subsidiary which also issued keepwell bonds and, this month, the Shanghai Financial Court ordered the company to pay a bondholder on account of the keepwell deed. In the following sections, we take a closer look at the specifics. And, while there is no firm conclusion about the enforceability of a keepwell deed, the latest news shows that the situation is not cut-and-dry and the keepwell feature in bonds might not be worthless after all.Source: https://events.debtwire.com/apchart-of-the-week-keepwells-back-19-of-chinese-hy-bonds-ytd-while-pkfounder-cefc-bring-structure-on-focus

Dalian Wanda Commercial Properties (1567411D HK)

Keepwells: Not Dead Yet - There Might Be Some Protection After All?