China South City, the debt-laden developer, is on the brink of facing a groundbreaking lawsuit from offshore creditors who are gearing up to take legal action against its major state-owned shareholder, Shenzhen SEZ Construction and Development Group. The suit, utilizing a keepwell provision, comes after China South City missed a principal payment, amounting to $11.25 million, on a dollar bond. If filed, this case would mark the first lawsuit against a state-backed developer in the beleaguered Chinese property sector, adding to the industry’s woes since the crisis began in 2021.
First-of-Its-Kind Legal Battle in the Property Sector Crisis
The group of creditors, forming an ad-hoc group, is preparing to file the lawsuit in a Hong Kong court, citing a keepwell provision that Shenzhen SEZ had provided to China South City’s dollar bonds. This legal move is unprecedented in the property sector crisis, potentially setting a significant precedent for debt recovery cases involving state-backed developers.
Keepwell Provision and Uncharted Territory
While not a direct guarantee, a keepwell provision acts as a credit enhancement mechanism, and its use in offshore bonds has been a trend among Chinese companies. The suit focuses on recovering payments under this provision. The rare instance of China South City’s keepwell provision highlights the unique circumstances surrounding the developer’s financial stress, and how a state-owned company intervention had initially instilled confidence among bondholders.
Struggle Amidst Financial Support and Failed Proposals
Despite government support and the backing of Shenzhen SEZ in 2022, China South City continued to grapple with financial difficulties. Attempts to extend bond maturities and proposals to delay payments were met with mixed results, ultimately leading to the developer’s default on offshore debts and the potential landmark legal action by offshore creditors.
Seeking Legal Action Amidst Liquidation Considerations
The ad-hoc group of offshore creditors is not only pursuing a lawsuit against Shenzhen SEZ but is also contemplating legal steps in Hong Kong to seek the liquidation of China South City. This multi-pronged approach aims to address the developers’ financial obligations and includes discussions for a consensual restructuring, with hopes that the state-owned enterprise will contribute positively to the process.
