Update: a keepwell deed and offshore bond support structure

A keepwell deed (a parent-company support undertaking, common in PRC offshore bond structures) sits at the centre of one of the most structurally contested areas in cross-border capital markets work. The instrument commits a Mainland parent to maintain the liquidity and net-worth position of an offshore issuer (the special-purpose vehicle that issues the bonds), without creating a direct guarantee that would require Mainland regulatory approval. That distinction – support rather than guarantee – now draws closer regulatory and judicial scrutiny across the Hong Kong–Mainland corridor than at any point in the past decade.

The immediate trigger is structural, not legislative. Courts in both Hong Kong and the Mainland have repeatedly been asked to rule on whether a keepwell deed creates an enforceable obligation, a mere comfort letter, or something in between. The answer turns on the precise drafting of the deed, the governing law, and the seat of any dispute resolution clause. For issuers and investors active on this corridor, the current environment calls for a document review, not a wait-and-see posture.

What the structure does – and where it is straining

A typical offshore bond support structure pairs the keepwell deed with an equity-interest purchase undertaking (a commitment by the Mainland parent to buy the issuer's equity at par if a liquidity event occurs) and, sometimes, a deed of equity interest purchase undertaking from the Mainland operating subsidiary. Together, these instruments are designed to give offshore bondholders the economic exposure of a Mainland parent guarantee without triggering the Mainland's cross-border guarantee approval requirements.

The structural vulnerability is enforcement. When an issuer defaults and bondholders attempt to rely on the keepwell deed, the action runs against the Mainland parent – a company whose assets sit onshore. A Hong Kong judgment or arbitral award against that parent then requires recognition and enforcement in the Mainland. Under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), in force since 29 January 2024, that recognition route is more accessible than under the prior regime. But "more accessible" is not the same as "straightforward". The connection-based test under Cap. 645 still requires the judgment to be final and effective, and the exclusion list applies.

For arbitral awards, the 1999 Arrangement and its 2020 Supplemental Arrangement provide a parallel route. Simultaneous enforcement applications in both jurisdictions have been available since the 2021 amendment to that Arrangement. The sequencing of those steps – Hong Kong Court of First Instance registration alongside Mainland court recognition – is where our cross-border practice sees the greatest number of stalled positions.

Who this affects and what to do now

Three groups face the most immediate exposure.

First, offshore bondholders and trustees holding instruments documented on legacy keepwell structures. If the issuer is showing signs of distress, a pre-default review of the deed's governing law, dispute resolution clause, and cross-border enforcement route is essential. Acting after default is not impossible, but the options narrow quickly.

Second, Mainland issuers and their offshore SPV subsidiaries planning new issuances or re-financings. The market expectation of what a keepwell deed does has shifted. Investors are asking harder questions about substance. A structure built around a keepwell deed should now be tested against the substance, treaty-access and beneficial-ownership requirements that Hong Kong's holding-structure rules impose – not only against the bond documentation.

Third, groups using BVI or Cayman holding entities above the offshore issuer. The economic-substance regimes in those jurisdictions have direct bearing on whether the structure holds its intended tax and regulatory character. A chart that looks clean on paper may not satisfy the substance test in practice. Our desk sees this consistently in cross-border restructurings where the holding layer was established before substance rules tightened.

The immediate action is a structured review of the keepwell deed itself, the issuer's dispute resolution clause, and the enforcement route under the current Mainland–HK reciprocal-enforcement regime. For groups that have already experienced a stalled enforcement attempt, a second read of the sequence – registration in Hong Kong, simultaneous application in the Mainland, interim measures where available – can identify what is still open.

For a preliminary read on your keepwell structure and the cross-border enforcement route it currently supports, email info@lockhartyip.com.

Related practices

• Holding Structures – cross-border holding, substance, and treaty access
• Cayman Holding Structures: Analysis – offshore holding layers and substance requirements
• Keepwell Deed Structure: Practical Guide – step-by-step on the offshore bond support mechanism

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Related

• Holding Structures
• Holding Structure Family Owned Group Cayman Islands Cayman 4
• Keepwell Deed Offshore Bond Support Structure Guide

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.