Credit improvement is a risk mitigation method by which a company attempts to increase its solvency in order to attract investors to its securities offerings. Increased credit reduces the risk of credit or default, which increases a company`s overall solvency and reduces interest rates. For example, an issuer may use credit enhancements to improve the credit quality of its bonds. A Keepwell agreement is a way to improve a company`s solvency by obtaining third-party credit support. In addition, a Keepwell agreement helps improve the subsidiary`s lending through the parent company`s credit assistance. It attracts investors and reduces the risk of default, increases the subsidiary`s credit rating and reduces interest rates. 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. 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. However, a Keepwell agreement is the result of negotiations prior to its creation, and it is generally more vague and less specific than traditional legal obligations. There is no guarantee that such an agreement will be implemented, as it cannot be invoked legally. A Keepwell agreement is an agreement between a parent company and one of its junior companies.