Chinese corporates are increasingly providing keepwell and equity interest purchase undertaking deeds – in place of guarantees – in their offshore borrowing, reports Fitch Ratings. As these structures are still evolving, the credit ratings agency (CRA) evaluates the effect of these deeds to the overall debt structure on a case-by-case basis.
In its report, entitled
‘Subordination of Chinese Offshore Debt Issues’
, Fitch says it considers, in its recovery analysis, offshore debt as subordinated to all onshore debt for repayment, barring instances where there are guarantees from onshore operating entities. The CRA uses recovery analysis to determine whether to notch the ratings of offshore debt from the issuer’s issuer default rating (IDR).
Despite structural subordination, there have been few instances requiring Fitch to notch down offshore debt from the company’s IDR. This is due to relatively low financial leverage among rated Chinese corporates. This does not imply, however, that offshore creditors should necessarily expect full recovery in the event of default.
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