A Hong Kong court ruled that Tsinghua Unigroup Co. breached a payment support agreement tied to dollar bonds, marking a key victory for creditors in a broader legal dispute over a practice long used by Chinese firms to raise debt.
(Bloomberg) — A Hong Kong court ruled that Tsinghua Unigroup Co. breached a payment support agreement tied to dollar bonds, marking a key victory for creditors in a broader legal dispute over a practice long used by Chinese firms to raise debt.
Unigroup, a semiconductor giant previously affiliated with the elite Tsinghua University, was ordered to pay $483.8 million for failing to honor a so-called keepwell deed meant to backstop its US-currency notes. The lawsuit, filed by bond trustee Citicorp International Ltd. about two years ago, involves a $450 million bond from a Unigroup unit, according to data compiled by Bloomberg.
The note jumped 1.8 cents to 39.5 cents Friday, Bloomberg-compiled prices show, set for the biggest gain in a month.
“The Unigroup ruling is significant in that it illustrates how keepwells can be a source of material credit enhancement,” said Fergus Saurin, the legal adviser to the bondholders behind the trustee’s lawsuit. A keepwell is an agreement from the parent company of a unit issuing a bond to maintain the issuer’s solvency while stopping short of guaranteeing payment.
“While the decision might not herald a keepwell renaissance, if a guarantee is not a commercially or legally practicable option then a keepwell is likely to be one of a range of potential credit-enhancement substitutes under consideration at the structuring stage,” added Saurin, a Hong Kong-based partner at law firm Kirkland & Ellis LLP.
The ruling may revive some confidence in China’s offshore credit market, where the keepwell structure remains a dominant feature for many bonds that have either defaulted or are facing payment risks. Investor mood suffered a setback last month after the same Hong Kong court threw out three of four similar lawsuits against Peking University Founder Group Corp., another major defaulter.
A “major difference” between Unigroup and Founder cases is that “the default on bonds issued by the Tsinghua Group, which lead to the present claims, took place before Tsinghua was ordered into reorganisation on 16 July 2021. This is not the case in Peking Founder,” the court ruling cited Judge Jonathan Harris as saying. He also presided over the Founder cases.
“The court accorded differential treatment to the claimants in the Tsinghua and Peking Founder cases on the basis of timing: whether or not the breaches took place before the keepwell provider went into reorganisation,” said Tony Chow, director of restructuring and insolvency at law firm King & Wood Mallesons. “This is not something investors would typically have control over.” He expects more legal battles over keepwells.
To Saurin, the two cases “establish that keepwell obligations are in principle binding and enforceable contractual obligations, and that the court is willing to make significant money judgments if the obligations are breached.” While the results are creditor-friendly, especially the Unigroup decision, “they aren’t guarantees,” he said. “The devil is in the detail, in particular around the circumstances in which the obligations are engaged and their sensitivity to the PRC regulatory regime.”
Unigroup, a firm once at the forefront of Beijing’s tech race with Washington, entered court-led debt reorganization proceedings in China following a series of defaults on local and offshore bonds.
The case number for Unigroup’s keepwell-bond lawsuit is HCA 1269/2021.
–With assistance from Kiuyan Wong.
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