Shanghai court’s nod to Hong Kong ruling on keepwell clause bodes well for offshore creditors of defaulting Chinese bonds

Keepwell clauses are undertakings by Chinese companies to guarantee the solvency and financial well-being of their units when they sell bonds in offshore markets

First seen in 2012 before China developed a tolerance for such guarantees, keepwell provisions were the workarounds that helped companies raise capital

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A facial recognition system developed by Tsinghua Unigroup at the first Smart China Expo in Chongqing on August 23, 2018. Unigroup defaulted on a US$450 million keepwell-backed bond. Photo: Reuters

Published: 6:15am, 9 Dec 2020Updated: 6:54am, 9 Dec 2020

In November 2017, a little-known Chinese oil storage company made headlines when it won a HK$40.2 billion (US$5.15 billion) bid to buy one of Hong Kong’s tallest office towers, setting a record for what was then the world’s costliest real estate transaction.

The daring takeover of The Center by China Energy Reserve & Chemicals Group (CERCG) sputtered within three months, as it failed to secure approvals to remit funds from China. Another three months after the flop, CERCG missed a payment on US$350 million of offshore bonds.

CERCG is not the first or only Chinese borrower to leave overseas bondholders in the lurch. An estimated US$96 billion of bonds, or 16 per cent of China’s foreign-currency corporate debt, are backed by so-called keepwell guarantees whose enforceability are questionable. At least seven issuers have defaulted on 11 issues totalling US$4.18 billion, according to Bloomberg data.

A turning point may now be in sight, after the Shanghai Financial Court ruled on November 16 to recognise an August 2018 verdict in Hong Kong that ordered CEFC Shanghai International Group to pay holders of a €29 million (US$35 million) note, on account of the keepwell undertaking by its parent, controlled by the missing oligarch Ye Jianming.

The Shanghai verdict, the first known ruling on legal claims involving keepwell clauses, “represents helpful guidance for bondholders in future where a similar set of facts apply,” said Jonathan Leitch, a restructuring partner at international law firm Hogan Lovells in Hong Kong, though he warned that “it does not necessarily set a broad precedent for the future enforcement of keepwell claims in China.”

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