Although a Keepwell agreement indicates that a parent company is willing to support its subsidiary, these agreements are not guarantees. The promise to implement these agreements is not a guarantee and cannot be relied upon legally. The subsidiaries enter into Keepwell agreements to increase the solvency of debt securities and business loans. A Keepwell agreement is a contract between a parent company and its subsidiary, in which the parent company provides a written guarantee for maintaining the subsidiary`s solvent and health capacity, maintaining certain financial ratios or capital levels. The parent company is committed to covering all of the subsidiary`s financing needs for a specified period of time. Not only banks and other lenders, but also suppliers offer more favourable terms. If the subsidiary wants 90-day terms and there is no Agreement from Keepwell, it is less likely that the supplier will agree. It is less likely to approve if the subsidiary has a bad credit history or is a new customer. To compensate for this, abC and XYZ sign a 10-year keepwell agreement. In the agreement, ABC is committed to keeping XYZ solvent and financially stable for the next 10 years.
This is a relief for the bank, which now knows that when XYZ companies stumble into China`s efforts, abc company will step in and make sure that credit payments are made. Company B is asking Company A for a 10-year agreement on Keepwell. In the contract, A Firm B will remain solvent and financially stable for a decade. investinganswers.com/financial-dictionary/…/keepwell-agreement-5594 Keepwell agreements benefit bondholders because they essentially guarantee that a parent company will save a subsidiary in the event of financial difficulties for the subsidiary. This makes the subsidiary more solvent and can make it easier to issue debts or borrow money. This is a type of credit protection that is mainly seen in the Chinese market of $791 billion of dollar bonds (sold outside mainland China, in U.S. dollars). Keepwell`s regime often involves a Chinese company`s commitment to keep an offshore subsidiary on the ground that issues bonds — but without guarantee of payment to bondholders.
(Actual guarantees must be subject to administration authorization, but keepwell is not).) The clauses often contain an agreement in which the parent company will purchase equity units or assets in the offshore subsidiary to serve payments on foreign bonds, as shown by an analysis by Fitch Ratings. Terms may vary, with different definitions of the standard, trigger events or what actions the Keepwell provider promises to take. Chinese companies began using Keepwell`s structure about seven years ago to allay skittish foreign investors` concerns about the solvency of a bond issuer. They became increasingly popular as Beijing policymakers adopted a more market-oriented business approach and increased corporate bond defaults. In 2017, the national foreign exchange authority, a market watchdog, adopted new rules on guarantees that allowed domestic companies to return money raised through offshore bonds. However, according to China International Capital Corporation, an investment bank, some Chinese issuers have maintained Keepwell`s structure because revenue usage rules are more flexible and regulatory approvals are even less necessary. A Keepwell agreement is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability for the duration of the agreement. Keepwell`s agreements not only help the subsidiary and its parent company, but also strengthen confidence in shareholders and bondholders in the subsidiary`s ability to meet its financial obligations and operate smoothly. Commodity suppliers also consider that a troubled subsidiary is more advantageous if it has a Keepwell agreement.