According to four sources, a group of China South City’s offshore creditors want to sue the developer’s largest state-owned shareholder for unpaid debts. This will be the first case of its kind in the troubled real estate market.

Creditors consider China South City to be in default on offshore loans totalling $1.3 billion since it failed to make the principle payment of $11.25 million on a dollar bond that matured on February 9 earlier this month, according to two bondholder sources.

The four sources claimed that the collection of creditors, who have organised into a “ad-hoc group,” is getting ready to sue state-owned Shenzhen SEZ Construction and Development collection Co., which holds 29% of the business, in a Hong Kong court.

The sources, who are aware of the situation, stated that the case will be brought utilising a keepwell clause that the state-owned shareholder had given to China South City’s dollar bonds.
Should a lawsuit be filed, it would be the first in the property sector against a state-backed developer to recover money owing to creditors under the keepwell clause since the market crashed in 2021.

In recent years, Chinese corporations have issued offshore bonds using a keepwell provision, a credit enhancement strategy that is not an absolute guarantee, according to attorneys.

According to a July Latham & Watkins report, a typical keepwell deed entails a parent company guaranteeing the solvent existence and sufficient liquidity of its offshore issuer subsidiary to fulfil payment obligations.

This lawsuit will supplement a few others that offshore creditors have brought before the Hong Kong court against Chinese developers; nearly all of these cases aim to liquidate the Chinese developers when they default on their debts.

Since 2021, the real estate industry, a vital pillar of the second-largest economy in the world, has lurched from crisis to crisis as a result of a regulatory crackdown on a debt-fueled construction boom that caused an unparalleled liquidity pressure.

The number of Chinese developers who have defaulted and included a keepwell clause in their bond sales is not readily apparent. According to the four sources, China South City’s keepwell provision is an uncommon instance in the real estate industry.

Because the subject is so delicate, none of the sources agreed to be named. Requests for comment from Reuters were not answered by Shenzhen SEZ, China South City, or Kirkland & Ellis, the legal firm representing the ad hoc consortium of developers.

China South City, a developer of integrated logistics and trade hubs situated in Shenzhen, was among the first real estate companies to get government backing when it encountered financial difficulties in 2022.

At that point, the state asset regulator, Shenzhen SEZ, acquired a 29% share in the developer and added keepwell clauses to its five tranches of dollar bonds.

A bondholder, who wished to remain anonymous, stated, “People like myself got in because of the keepwell clause,” adding that the implementation of that condition plus the fact that the corporation was state-owned gave confidence.

With bondholder approval, China South City was able to move the five dollar bonds’ initial 2022 and 2023 maturity dates to 2024. The developer’s financial status hasn’t changed since then, though.

China South City attempted to postpone payments once more in December, but was unable to get sufficient support. The developer said on February 9 that it would not be able to pay interest and redemption this month.

According to one of the individuals, China South City’s offshore creditors were thinking about filing a lawsuit in Hong Kong to demand the company’s liquidation.

“Creditors are happy to have conversations with China South City for a consensual restructuring but would appreciate the SOE keepwell provider contribute to the process as well,” said Lance Jiang, partner at law firm Ashurst, which is representing some of the developer’s bondholders.

(Adapted from Reuters.com)

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