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. 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. In order to continue production and keep interest rates low, XYZ Inc. may enter into an agreement with parent company ABC Co. on the holding framework for a term equal to the term of the loan. ABC Co. ensures that XYZ Inc. will remain financially stable for the duration of the loan.
It will increase the creditworthiness of XYZ Inc. and can insure the loan with lower interest rates. A Keepwell agreement can also be developed to improve the credit of a loan. If a subsidiary does not make bond payments, the loan administrators may apply the agreement in the interest of the bondholders. The parent company assumes responsibility for keeping the subsidiary in good financial health. A Deal from Keepwell allows the subsidiary to appear more solvent to lenders. It implies that the subsidiary of the subsidiary (Sub) is an entity or a commercial company wholly or partially controlled by another parent company or holding company. Ownership is determined by the percentage of shares held by the parent company, and this shareholding must be at least 51%.
loans are more likely to be approved if there is a Keepwell agreement. The guarantee period is set by both parties and set at the time of the dismantling of the contract. A Keepwell agreement is an agreement between a parent company and one of its junior companies. The parent company promises that it will make all financing requirements available to the subsidiary for a specified period of time.