Sales of Chinese keepwell bonds to shrink after ‘epic, unproductive’ court fight, S&P says

A PUFG case comes up short in a test of the keepwell structure’s ability to address subordination risk in a default, S&P says

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Peking University Founder Group, the business arm of one of China’s prestigious colleges. Photo: Weibo

Published: 11:00am, 23 Apr 2025

Sales of keepwell bonds by mainland Chinese companies are likely to shrink further after a court decision in Hong Kong failed to clarify the structural subordination risks plaguing investors holding US$62 billion worth of them in Asia’s credit markets, according to S&P Global Ratings.

The Hong Kong Court of Final Appeal on March 19 published its ruling that three offshore issuers and guarantors of Peking University Founder Group (PUFG) – the business arm of China’s elite university – were only entitled to “nominal damages” after its units defaulted in 2020 on bonds totalling US$1.7 billion.

“While it awarded nominal damages to the plaintiff, investors’ losses remain deep,” Chang Li, China country specialist for corporate ratings, said in a report on Tuesday. “The PUFG case was an important test of the structure’s ability to address offshore investors’ subordination risk in a default. So far, it has come up short.”

Keepwell bonds were popular with Chinese companies seeking to issue dollar-denominated bonds through their offshore entities before 2017, bypassing state currency regulators. In providing such deeds, the onshore parent pledged to keep the issuing vehicle solvent by at least US$1 to make good on all its obligations.

The issuance fell to about US$7 billion in 2024 from about US$30 billion in 2017, S&P said, bringing the outstanding Chinese keepwell-backed bonds in the market to US$62 billion.