The legal validity of keepwell deeds is on focus with Peking University Founder Group’s Chinese bankruptcy administrators leaving claims on bonds backed by this structure pending and a Shanghai court reserving judgment on such claims by CEFC China Energy bondholders.

So far this year, USD 5.4bn Chinese USD high-yield bonds were backed by keepwells -- a credit enhancement provided by some Chinese companies for bonds issued by their offshore subsidiaries -- amid an overall lifeless primary market. In the whole of 2019, bonds with USD 6.77bn aggregated principal were supported by the structure, while it was USD 7.6bn in 2018.

Keepwell-enhanced issuances accounted for 18.8% of the total Chinese offshore HY bond volumes in 2020 YTD, while it was 7.2% in the entire 2019 and 13.7% in 2018. However, the increase in share YTD this year was largely skewed by China Evergrande-owned Hengda Real Estate  Group’s massive USD 4bn dual-tranche notes priced in late January. The property developer issued its first-ever keepwell bonds in 2018.

In 2020 YTD, USD 7.26bn, or 25.3%, of the overall Chinese USD HY bonds incorporated an onshore guarantee. In 2019 and 2018, that was 29.6% and 30.8%, respectively.

The last Chinese HY bond priced with a keepwell enhancement was Guangzhou R&F Properties’ USD 400m, 8.625% due-2024 notes on 27 February, while in the IG space, the most recent was local-government financing vehicle Qingdao City Construction Investment (Group)’s USD 300m 3.99% due-2023 notes priced on 22 April.

As of now, USD 3.12bn keepwell-backed USD HY bonds are slated to mature by the end of this year, followed by USD 3.45bn in 2021. These figures exclude PKFounder’s bonds.

As Debtwire first reported on 30 April, Peking University-backed conglomerate PKFounder’s PRC administrators left pending claims stemming from CNY 12.05bn-equivalent bonds backed by keepwells since there is no precedent in China validating the structure.

Separately, the Shanghai Finance Court on 12 May reserved its order on whether it would recognize a Hong Kong ruling validating the keepwell-structure claims for CEFC China Energy’s EUR 29.91m 2.8% notes.

Click here for Debtwire’s legal analysis on PK Founder and CEFC keepwell-based claims.

Jason Huang-Jones APAC Data Manager Debtwire