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China Credit: Peking Founder Keepwell Ruling
Sandra Chow, CFA – Co-Head of Asia-Pacific Research
Zoey Zhou Qianyun – Analyst - Chinese Corporates
EXECUTIVE SUMMARY
- The complicated status of keepwell bonds was highlighted yet again last week, after a Hong Kong court ruling on defaulted conglomerate Peking Founder. The court dismissed three of four actions. The fourth action succeeded on the basis that the claimant (Founder Information (Hong Kong) Ltd, the guarantor of $ bond issuer Kunzhi Ltd) already had a deficit before Peking Founder’s reorganisation, causing Peking Founder to be in breach of its obligations under the keepwell. The judge rejected the other actions stating that that once Peking Founder was in reorganisation, there would have been “no realistic likelihood of approvals being given to transfers out of the Mainland”.
- Keepwell agreements are contractual obligations by the keepwell provider (usually an onshore parent company) to maintain the liquidity and solvency of its offshore subsidiary. Their efficacy had been thrown into doubt after Peking Founder’s onshore restructuring administrator rejected its keepwell claims in 2020, prompting the court filings in Hong Kong.
- The successful claim in Hong Kong suggests that keepwell agreements are not worthless, but the amount that Peking Founder was found liable for (c. RMB 1.2 bn) was still far below the claim of RMB 5.7 bn. Bondholders were likely also disappointed by the rejection of the other three actions against Peking Founder.
- That said, there was little spread movement among other keepwell bonds after the ruling, suggesting that the market already views the perceived benefits of keepwell bonds with a sensible degree of scepticism. A ruling for a similar case involving defaulted semiconductor conglomerate Tsinghua Unigroup is due in the coming months too, which will provide another benchmark for investors to calibrate their keepwell comfort levels.
IT’S COMPLICATED
The complicated status of keepwell agreements was highlighted once again last week, following a Hong Kong court ruling on defaulted conglomerate Peking University Founder’s (Peking Founder’s) keepwell bonds. The court dismissed three of four actions, but a fourth action succeeded.
Keepwell agreements are type of credit enhancement used by Chinese offshore bond issuers. It is a contractual obligation by the keepwell provider (usually an onshore parent company) to maintain the liquidity and solvency of its offshore subsidiary. In Peking Founder’s case, the keepwell agreements related to offshore bonds issued by two BVI-incorporated entities: Kunzhi Ltd and Nuxoi Capital. These bonds were guaranteed by their respective Hong Kong-incorporated parent companies: Founder Information (Hong Kong) Ltd (FIHK) and HongKong JHC Co Ltd (HKJHC). FIHK and HKJHC have since been wound up and Kunzhi and Nuoxi are in liquidation.
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