A group of offshore creditors of China South City is 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 due on Feb. 9, and is deemed by creditors to be in default on offshore debts worth $1.3 billion, two bondholder sources said.
The group of creditors, who have formed a so-called ad-hoc group, is 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, law firm Latham & Watkins said in a customer 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 of them seeking their liquidation after they failed to meet repayment obligations.
The property sector, a key pillar of the world's second-largest economy, has lurched from one crisis to another since 2021 after a regulatory crackdown on a debt-fueled construction boom triggered an unprecedented liquidity squeeze.
It is not immediately clear how many of the defaulted Chinese developers have the keepwell clause in their bond offerings
