Keepwell Agreement: Definition, Benefits, and Risks
What Is a Keepwell Agreement?
A keepwell agreement is a written contract in which a parent company formally promises to maintain the financial health of its subsidiary. Common in cross-border bond offerings, especially by Chinese corporates, the covenant reassures lenders and bondholders that the parent will inject capital or ensure minimum net worth so the subsidiary can meet debt obligations as they fall due.
How a Keepwell Agreement Works
Unlike a guarantee, a keepwell agreement does not create an automatic legal claim on the parent’s assets. Instead, it is a moral and contractual undertaking. Typical clauses require the parent to keep the subsidiary solvent, maintain specified leverage ratios, or provide liquidity support within a stated time frame, thereby boosting the subsidiary’s credit rating and lowering its funding cost significantly.
Benefits for Investors and Issuers
For investors, the presence of a keepwell agreement can bridge the gap between onshore and offshore credit profiles, opening access to higher-yield opportunities with mitigated downside. Issuers benefit by tapping international markets at competitive spreads without the regulatory burden of a formal guarantee. Rating agencies often grant a one-to-two-notch uplift when the parent demonstrates sufficient capacity and strategic motivation to support.
Risks and Legal Enforceability
Despite those advantages, keepwell agreements have come under scrutiny following several high-profile defaults where parents declined to honor their pledges. Because enforcement usually relies on offshore courts and may conflict with local bankruptcy proceedings, recovery outcomes are uncertain. Investors must therefore analyze parent liquidity, corporate governance, and political considerations, and should not assume the agreement offers the same protection as a legally enforceable guarantee.
Key Takeaways
When evaluating a bond supported by a keepwell agreement, ask three questions: Can the parent pay, will the parent pay, and is there a clear path to enforcement? Positive answers to all three can justify a credit uplift, while negative answers warrant higher yields or avoidance. Ultimately, a keepwell is a useful credit enhancement, but not a substitute for thorough due diligence.