In cross-border financing, a parent company may not always be willing to offer a guarantee to its subsidiary’s debt. Lü Zhuo, Chen Si and Li Yuan from China Development Bank consider additional credit enhancement methods from which lending banks can draw support, as well as their legal obligations and enforceability
For banks in Hong Kong, some of their clientele are the offshore platform companies of mainland parent companies. These companies frequently find themselves in positions where their parent companies are reluctant or unable to provide a guarantee to financing, due to internal approvals required or potential influences on their flow of capital.
Companies in these circumstances should make efforts to pursue credit enhancement methods that take into account risk control, rather than allowing themselves to accept unsecured financing. Methods frequently employed primarily include letters of comfort and letters of sponsorship. These are inferior to guarantees in terms of guaranteeing repayment, yet they can be fairly good at sustaining risk.
An additional measure to enhance credit is the keepwell agreement. This relatively new method provides superior risk prevention over other credit enhancement methods.
Lü Zhuo is general manager of the project appraisal department of China Development Bank Hong Kong Branch. Chen Si is the assistant manager and Li Yuan is the senior officer of the project appraisal department