Peking Founder restructuring shows limitations of China's keepwell deeds - Moody's

SHANGHAI, June 29 (Reuters) - The restructuring of China’s Peking University Founder Group Corp (PUFG) highlights the limitation of keepwell deeds in protecting investors, ratings agency Moody’s said on Monday, casting a cloud over a structure used in almost $100 billion worth of Chinese dollar bonds.

Keepwell deeds are used by some Chinese companies to facilitate offshore bond sales by their subsidiaries.

State-owned Peking Founder in February confirmed its failure to repay an onshore bond had led to a cross-default on $3 billion of offshore bonds. Most of the bonds were supported by Peking Founder via keepwell deeds.

Moody’s said in a report on Monday that under the ongoing restructuring, it was not yet clear whether the court would recognise those keepwell-backed bonds as debt obligations of Peking Founder, the deed provider.

If not, bondholders will lack direct recourse to Peking Founder, potentially leading to low recovery and high loss.

Even if the keepwell-backed bonds are recognised as debt obligations, they could be ranked lower in the priority of claims than Peking Founder’s senior unsecured debts, meaning recovery would also be lower.

Compared with bond guarantees, “keepwell deeds are subject to much greater legal and regulatory uncertainties,” Moody’s wrote. The Peking Founder case warrants attention, as the issue “will gain relevance as China’s economic slowdown continues”.

Peking Founder’s restructuring is being watched closely by bond investors and rating agencies, and court decisions could lead to a re-pricing of keepwell-backed bonds issued by Chinese companies.

“There has previously been no precedent on enforcement of keepwell structures,” Fitch ratings said in a report last month.

“We continue to evaluate the PUFG case as it develops, and will revisit our rating approach if warranted.”

According to the Fitch report, nearly $100 billion of outstanding offshore bonds issued by Chinese companies contain keepwell provisions.

Moody’s said as of June 17, it rated bonds with keepwell deeds issued by 38 offshore subsidiaries of Chinese companies. (Reporting by Samuel Shen and Brenda Goh; Editing by Mark Potter)