Company A agrees and the two sign the agreement. The creditworthiness of Company B is now much higher than before. It can now get credit at much lower interest rates. 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. A Keepwell agreement is a legal agreement between a parent company and a subsidiary to ensure solvency and financial stability for the duration of the agreement. 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. The Keepwell agreement specifies the length of time the parent company is prepared to provide financial assistance to the subsidiary. This means that with this document, a subsidiary has a good chance that credit institutions will approve their credit applications. The contract also allows the subsidiary and suppliers to easily close transactions. Note that this document is a guarantee to suppliers that they will receive their payment.
A Keepwell agreement is an agreement between a parent company and one of its subsidiaries. The parent company is committed to covering all of the subsidiary`s financing needs. Subsequently, the chances of success in China are much greater thanks to the Keepwell agreement. In order to keep production on track and keep the loan interest rate as low as possible, Computer Parts Inc. may enter into a Keepwell agreement with its parent company, Laptop International, to secure its financial solvency for the duration of the loan. In early November, a mainland Chinese court effectively recognized for the first time creditors` claims on offshore bonds of a Chinese default, which were backed by a Keepwell provision. The contract in the case of CEFC Shanghai International Group Ltd. could set a precedent for others facing similar bottlenecks, including the Peking University group.
The exuberant conglomerate with medical and Internet companies entered in February in a judicial restructuring of the debt. Many bonds sold by their foreign subsidiaries were well booked, and the people who bought them are now trying to get their money back. Some of these bondholders filed a lawsuit after Founder Group`s restructuring administrator rejected their claims on five Keepwell bonds in August. 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. (Actual guarantees must be subject to administration authorization, but keepwell is not).) The clauses often contain an agreement in which the parent company will purchase equity units or assets in the offshore subsidiary to serve payments on foreign bonds, as shown by an analysis by Fitch Ratings. Terms may vary, with different definitions of the standard, trigger events or what actions the Keepwell provider promises to take. Because a Keepwell agreement increases the solvency of the subsidiary, lenders are more likely to authorize loans for a subsidiary than for businesses without it. Suppliers are also more likely to offer more advantageous terms to companies that have firms that have Done Keepwell agreements. Due to the financial obligation imposed on the parent company by a Keepwell agreement, the subsidiary may receive a better credit rating than in the absence of a signed Keepwell agreement. The subsidiary may develop a De Keepwell agreement as a form of credit enhancement for a loan.
The parent company is committed to financing the subsidiary