Two recent landmark decisions provide valuable guidance on this commonly used form of credit enhancement.

Keepwell deeds have in recent years grown into a common form of credit enhancement used by companies in mainland China for offshore bonds issued by their subsidiaries. Under a typical keepwell deed, a parent company in mainland China undertakes to ensure that its offshore issuer subsidiary will remain solvent and that it will have sufficient liquidity in order to meet payment obligations under the bonds. This structure is designed to avoid the mainland parent needing to obtain regulatory approvals to overcome restrictions on mainland businesses borrowing in foreign currencies as well as currency exchange limitations in servicing and repaying such borrowings. For similar reasons, it is important that a keepwell obligation falls short of an outright guarantee and most are carefully drafted to avoid this outcome. Once a keepwell obligation has been triggered, the mainland parent will be required to obtain regulatory approvals in order to perform it.