A Keepwell agreement guarantees bondholders and lenders that the subsidiary can meet its financial obligations and continue to operate smoothly. A solvent subsidiary may be viewed positively by suppliers as part of the agreement. Keepwell`s 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. 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. 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. When a subsidiary is having difficulty obtaining financing to continue its operations, a Keepwell agreement is useful. The parent company will support it financially and help it maintain solvency during the period defined in the agreement. When an entity enters into a De Keepwell agreement, the solvency of corporate bonds and debt securitiesThe debt instrument is an investment income asset that legally obliges the debtor to grant interest and repayments to the lender.
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. Subsequently, the chances of success in China are much greater thanks to the Keepwell agreement. However, according to Bond Supermart, Keepwell`s agreements are not legally binding, contrary to an appropriate guarantee. Therefore, auditors should verify the language of the Keepwell agreement and attempt to determine potential liabilities that are not disclosed in the financial statements where there is a De Keepwell agreement. Information on potential liabilities related to the agreement can be obtained from management and third parties. The fidelity agreement relates to a legal contract entered into by a parent company to its subsidiary for the purpose of maintaining financial assistance and solvency during the agreed period. A subsidiary refers to a company that accounts for 50 per cent of the shares of a parent company.
The assistance provided in the contract gives confidence to potential lenders while increasing the solvency of the subsidiary. 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. 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.