Exclusive-In a first, Chinese developer's creditors plan to sue state-owned shareholder for dues
By Xie Yu
HONG KONG (Reuters) — A group of offshore creditors of China South City are set to file a lawsuit against the debt-laden developer's biggest state-owned shareholder for dues, four sources said, in what would be the first such case in the crisis-hit property sector.
China South City earlier this month missed a principal payment of $11.25 million on a dollar bond that matured on Feb. 9, and is deemed by creditors to be in default on offshore debts worth $1.3 billion, two of the bondholder sources said.
The group of creditors, who have formed a so-called ad-hoc group, are preparing to file the lawsuit in a Hong Kong court against state-owned Shenzhen SEZ Construction and Development Group Co., which owns 29% of the company, the four sources said.
The lawsuit will be filed using a keepwell provision, which the state-owned shareholder had provided to China South City's dollar bonds, said the sources, who have knowledge of the matter.
If filed, it would be the first lawsuit against a state-backed developer in the property sector for recovery of payments owed to creditors under the keepwell provision since the industry tipped into a crisis in 2021.
A keepwell provision, while not an outright guarantee, is a credit enhancement mechanism that has been used by Chinese companies in recent years for issuance of offshore bonds, according to lawyers.
Under a typical keepwell deed, a parent company undertakes to ensure that its offshore issuer unit will remain solvent and that it will have sufficient liquidity in order to meet payment obligations, said a Latham & Watkins note issued last July.
The lawsuit will add to a handful of cases filed in the Hong Kong court against Chinese developers by offshore creditors, almost all
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