Credit-Enhancement Mechanisms for Dim Sum Bonds : Structures and Risks

Due to the People's Republic of China (PRC) foreign currency control law, PRC companies are restricted in providing guarantees to any overseas loan, including bonds issued by their overseas companies. At the same time, there are various difficulties in enforcing in the PRC an overseas judgment obtained against a PRC company which provides the guarantee. To overcome the restrictions, two mechanisms, namely the Keepwell and Liquidity Support Deed and the Deed of Equity Interest Purchase Undertaking, have been adopted and widely used to act as quasi-guarantees in support of the bond issuance. This article first discusses the PRC foreign currency control law and the relaxation of the control since 1 June 2014. Despite the relaxation, it is expected that the two quasi-guarantees would continue to be widely used due to certain restrictions found in the new regulation. It then explores the operation structures of the two deeds and concludes that there are certain inherent risks and issues which will hinder their intended purposes and hence offer insufficient protections to investors