What are keepwell deeds?
Keepwell structures have been widely used as a form of credit protection in recent years, especially in financing structures involving an offshore debtor with an ultimate parent incorporated in mainland China. Such structures would often involve an instrument known as a keepwell deed, which is executed by the onshore parent in favour of the financier.
Terms of the keepwell deed can vary, but they typically involve the onshore parent undertaking to maintain a certain shareholding, a positive net worth and sufficient liquidity in the offshore debtor. It is also usual for the onshore parent to agree to make available to the offshore debtor sufficient funds to enable it to perform its payment obligations.
While these terms create an obligation on the onshore parent to provide financial support to the offshore debtor in case it is unable to pay its debts, unlike corporate guarantees, keepwell deeds do not provide for a direct debt claim against the onshore parent for any due but unpaid obligation of the offshore debtor. In fact, there is usually an express provision in the keepwell deed that states neither the instrument itself nor anything contained therein constitutes a guarantee by the onshore parent.
Why are they used?
Currently1, an arrangement which involves an onshore parent guaranteeing the financial obligations of its offshore subsidiary would be classified as an “offshore loan guaranteed by an onshore entity”, and the relevant guarantee must be registered with the State Administration of Foreign Exchange of the People’s Republic of China (“SAFE“) within the prescribed period, failure of which will mean that the onshore parent will not be able to remit funds outside of mainland China to comply with its guarantee obligations. However,
such registration may not always be successful, as it can be dependent on mainland China’s latest policies on foreign exchange control. Because of this, keepwell deeds have become a popular alternative to guarantees.
目前 1，如境内母公司为其境外子公司的财务责任提供担保，相关安排将被归为“内保外贷”，而境内母公司作为担保人必须在 规定期限内向中华人民共和国国家外汇管理局（“外管局”）登记相关担保，否则境内母公司将无法将资金汇出中国境外以履行 其担保义务。然而，取决于中国境内关于外汇管制的最新政策，有关登记并不一定可以成功完成。正因为如此，维好协议已成 为担保的一种流行的替代方式。
The key reason for the popularity of keepwell deeds is the widely held perception that they are not subject to the same kind of regulatory requirements in mainland China as actual guarantees.
But are they really an alternative to guarantees?
The above common perception is due to change very soon, at least when it comes to keepwell deeds given by central state-owned enterprises and their subsidiaries.
To control the excessive growth in guarantee scales, the expansion of implicit guarantee risks, and increased risks of compensation losses, the State-owned Assets Supervision and Administration Commission of the State Council released the “Circular on Strengthening the Management of Financing Guarantees of Central State-owned Enterprises” (the “Circular“) on 19 November 2021 and an explanation document on 4 January 2022 in relation to the Circular.
为控制担保规模增长过快、隐性担保风险扩大、代偿损失风险升高等问题，国务院国有资产监督管理委员会于 2021 年 11 月 19 日发布了《关于加强中央企业融资担保管理工作的通知》（简称“该通知”），并于 2022 年 1 月 4 日发布了该通知的相关说 明。
According to the Circular and the relevant explanation, a document which provides any “comfort undertaking” is considered one of the various forms of “implicit guarantees”, which are subject to the same regulatory requirements as explicit guarantees. Keepwell deeds and letters of comfort are likely to fall under the definition of “implicit guarantees”. Central state owned enterprises are also expressly required to rectify their existing guarantees to ensure that they are in compliance with the latest regulations in mainland China.
根据该通知和相关说明，“安慰承诺”等支持性函件可视为“隐性担保”之一，所以亦应符合与担保相同的监管要求规定。而 维好协议和安慰函有可能属于“隐性担保”。中央企业也被明确要求对存量违规融资担保行为进行整改，以确保其符合中国境 内的最新规定。
For further information, please contact:
Anna Kwong, Partner, Stephenson Harwood