Offshore Creditors Take Historic Legal Action Against Chinese Developer’s Major Shareholder
Offshore Creditors Take Historic Legal Action Against Chinese Developer’s Major Shareholder
HONG KONG – In a groundbreaking move, a consortium of offshore creditors is set to initiate legal proceedings against the largest state-owned shareholder of the embattled property developer, China South City. This marks a significant escalation in the ongoing financial crisis that has engulfed the Chinese real estate sector.
China South City recently defaulted on a principal payment of $11.25 million due on February 9, 2023, for a maturing dollar bond. This default has triggered concerns among creditors regarding recovering offshore debts totalling $1.3 billion.
The lawsuit, to be filed in a Hong Kong court, targets Shenzhen SEZ Construction and Development Group Co., which holds a 29% stake in China South City. The legal action leverages the “keepwell provision” – a credit enhancement mechanism the state-owned shareholder provided to support the issuance of China South City’s dollar bonds.
This legal action is poised to be the first of its kind against a state-backed developer in the property sector concerning the recovery of payments under the keep well provision since the industry’s downturn in 2021.
The Chinese property sector has faced unprecedented challenges following a regulatory crackdown on excessive borrowing, leading to a liquidity crisis that has severely impacted developers and their ability to meet financial obligations.
The outcome of this lawsuit could set a precedent for future legal actions against state-owned entities in the real estate industry. It may influence the approach of offshore creditors in recovering debts from distressed developers.
