Creditors have initiated legal action in Hong Kong against the largest state-owned shareholder of China South City, aiming to recover $1.4 billion owed to them, according to court documents and a source familiar with the situation. This lawsuit marks the first instance of such action against a Chinese state shareholder of a developer seeking payment under the keepwell provision since the property sector encountered a debt crisis in 2021. The keepwell provision, although not a direct guarantee, serves as a credit enhancement tool frequently utilised by Chinese companies in recent years for the issuance of offshore bonds, as noted by legal experts. This lawsuit is part of a growing trend of legal challenges filed against defaulted Chinese developers in Hong Kong, as international creditors seek to recoup their investments amidst the unprecedented debt crisis in China's property market. In response to the lawsuit against China South City, summonses have been issued against Shenzhen SEZ Construction and Development Group Co. Ltd (SZCDG), the state-owned shareholder of the developer, according to a filing dated June 3 submitted to the Hong Kong High Court. The creditors' consortium, represented by Citicorp and law firm Mayer Brown, is seeking damages of at least $1.4 billion, leveraging the keepwell provision as outlined in the filing. Notably, SZCDG allegedly entered into a keepwell deed with creditors on August 9, 2022, to aid China South City in meeting its repayment obligations under a series of senior bonds. However, the developer missed a principal payment of $11.25 million on a dollar bond due on February 9, 2024, followed by defaults on payments related to two other tranches of notes in April, as revealed in the filing. The state shareholder is accused of failing to fulfil its obligations in providing credit support. Consequently, the group of creditors is pushing for SZCDG to repay the outstanding principal amounts, accrued interest, and associated fees, as detailed in the filing. SZCDG holds a 29% stake in China South City, according to the developer's 2023 annual report. Specialising in the construction and operation of infrastructure and industrial parks, SZCDG is owned by the Shenzhen government, according to its official website. Earlier this year, a consortium of bondholders had proposed utilising the Hong Kong law-governed keepwell deed to pursue legal action against the state shareholder for outstanding dues, as reported by the source in February. (Source: Reuters & ET)