In a groundbreaking move within the crisis-stricken property sector, a consortium of offshore creditors of China South City is gearing up to file a lawsuit against the company’s largest state-owned shareholder for outstanding debts. This legal action marks a significant development in the ongoing financial challenges faced by the embattled developer and underscores broader concerns within China’s real estate landscape.
Missed Payments and Default:
China South City recently made headlines after failing to meet a principal payment of $11.25 million on a dollar bond due on February 9. Consequently, creditors, holding offshore debts totaling $1.3 billion, have deemed the company to be in default. This financial turmoil has prompted offshore creditors to take decisive legal action against the state-owned Shenzhen SEZ Construction and Development Group Co., which holds a 29% stake in China South City.
Legal Action and Keepwell Provision:
The group of creditors, organized into an ad-hoc entity, is poised to file a lawsuit in a Hong Kong court against Shenzhen SEZ. This unprecedented move hinges on the utilization of a keepwell provision, a credit enhancement mechanism that was provided by the state-owned shareholder to support China South City’s dollar bonds. While not constituting a direct guarantee, the keepwell provision ensures the financial stability of the offshore issuer and its ability to meet payment obligations.
Industry Fallout and Regulatory Scrutiny:
The impending lawsuit against a state-backed developer reflects the broader challenges confronting China’s property sector since 2021. A regulatory crackdown on excessive debt levels and speculative practices has triggered a cascade of financial distress among developers, leading to an unprecedented liquidity crunch. This legal maneuver adds to a growing list of cases filed against Chinese developers by offshore creditors, signaling the escalating tensions within the industry.
Financial Strain and Investor Concerns:
Despite previous government support and financial interventions, China South City continues to grapple with deepening financial woes. Efforts to extend bond maturities and secure consensus from bondholders have faltered, exacerbating concerns among offshore creditors. With sales below expectations and liquidity constraints impeding operations, the developer’s precarious financial situation underscores the urgency for resolution and restructuring.
Path Forward and Stakeholder Engagement:
As legal proceedings unfold, stakeholders are navigating complex negotiations and seeking avenues for consensual restructuring. While creditors remain open to dialogue with China South City, the involvement of the state-owned shareholder in the restructuring process is deemed crucial. The outcome of the lawsuit and subsequent developments will likely shape the trajectory of China South City’s financial restructuring and its implications for the broader real estate sector.
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Credit: Xie Yu