China's Shimao Group 'Faces Liquidation Suit From Foreign Bank'

Chinese developer Shimao – one of many local building groups that have defaulted on offshore bonds – is set to face a lawsuit that calls for its liquidation, sources say.

Deutsche Bank is preparing a lawsuit that will be lodged in a court in Hong Kong, according to two sources, after Shimao missed an interest and principal payment on a $1-billion offshore bond in July 2022.

It is rare for foreign firms to file a liquidation lawsuit but the move comes after 18 months of negotiations failed to reach a satisfactory outcome, and a flurry of credit defaults in China’s deepening property sector crisis.

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However, any hope that Beijing may intervene in a robust way to reinvigorate the property sector or offering significant help to major companies with their debt load appears to have evaporated amid growing realization that China’s local governments are also saddled with massive debts, of about $13 trillion, while Beijing appears to be focused on a major rejig of the property sector.

After the Shanghai-based Shimao missed the payment in mid-2022, its entire $11.7 billion worth of offshore debt was deemed to be in default.

The German bank, which is one of Shimao’s creditors, is looking to file the petition this month after it found the developer’s debt restructuring terms unacceptable, the two people with knowledge of the matter said.

Both sources declined to be identified as the matter is not public. Deutsche Bank declined to comment, and Shimao did not respond to Reuters’ queries.

Once a top-20 developer in China, Shimao presented its offshore debt restructuring terms to creditors in December last year following a year and a half of talks.

One of the sources said Deutsche Bank’s credit exposure to Shimao is linked to private dollar bonds. Reuters could not determine the amount of exposure Deutsche Bank had to the developer.

The move by Deutsche Bank, if finalised, will be a rare case of a large foreign financial firm initiating liquidation lawsuit of a Chinese developer since the sector slipped into a debt crisis in 2021.

Liquidation cases rising

The news comes after China Evergrande, the world’s most indebted property developer, was ordered to be liquidated by the Hong Kong court in January.

That case was filed by a city-based creditor filed a lawsuit against a developer laden with massive debts and a long-running criminal probe.

A liquidation petition has also been filed against Country Garden by another Hong Kong-listed company after failing to meet repayment obligations, China’s largest private property developer said this week.

The increase in liquidation petitions against developers comes at a time when Beijing is scrambling to revive the property sector with a string of support measures, and are likely to add to homebuyers’ concern about the outlook for real estate firms.

China’s property sector, a pillar of the world’s second-largest economy, slipped into a stifling liquidity crisis in 2021 after a regulatory crackdown on a debt-fuelled construction boom, weighing on property sales and new home prices.

A growing list of private developers have defaulted on their offshore repayment obligations since then, and many of them have been in various stages of preparations to restructure their debt with a view to stay afloat.

Liquidation petitions against at least 10 Chinese developers in Hong Kong and other overseas courts have been filed so far since the sector crisis started, according to Reuters’ calculation.

Analysts have said the rising number of liquidation petitions against the developers would pile pressure on the companies to come up with restructuring proposals acceptable to creditors.

Big write-offs by other banks

Deutsche Bank’s plan also comes on the heels of global peers HSBC and Standard Chartered taking big write-offs due to their exposure to China’s property sector via their holdings in local banks.

The filing of liquidation petition by Deutsche, however, would be rare.

In the case of Jiayuan International Group Ltd, another Chinese developer that has been ordered to be liquidated by the Hong Kong court, creditor HSBC was one of the early petitioners against the company.

Shimao was the first major Chinese developer to kick off formal negotiations on restructuring terms with creditors in 2022 for its $11.7 billion worth of offshore debt.

Last December, it updated a debt revamp plan that aimed to cut its offshore debt by up to $7 billion, by exchanging some debt for new loans with maturities up to nine years, among other proposals, the sources said.

Shimao has not yet reached an agreement with creditors on the new terms, the sources said, with creditors not willing to accept the proposed 50% haircut to their investments.