Developer China South City Faces More Tests After Debt Relief

Published 20 December 2023, 09:00:57.615 GMT
By Shen Hong and Wei Zhou

(Bloomberg) -- China South City Holdings Ltd., partially owned by the city of Shenzhen, won a reprieve after creditors agreed to extend a dollar bond maturity and lower its coupon, avoiding a default as it soon faces more payment tests ahead.

Holders of the 9% note due July 2024 — with $235 million of principal outstanding — agreed to push back its maturity date to August 2027 and halve the interest to 4.5%, according to a filing to the Hong Kong Stock Exchange Wednesday.

The outcome provides immediate relief as a grace period for the coupon payment was set to expire Wednesday. But China South City’s wrangling with bondholders likely will drag on as they failed to reach an agreement on four other dollar bonds that the company sought to negotiate at the same time.

The four bonds have a total outstanding principal amount of $1.1 billion. The company’s next payment test will come on Dec. 26, when an interest payment of around $13 million on one of those bonds, carrying a 9% coupon, will come due, according to Bloomberg-compiled data. The company will have a 30-day grace period on the bond, which matures on June 2024, before a default.

Still, creditors’ latest approval to lower a coupon adds to recent signs — including Country Garden Holdings Co.’s early bond payoff last week — that China’s beleaguered property industry may be able to avoid more defaults long enough for a hoped-for rebound in home prices and demand in the new year.

“I think this is an idiosyncratic case,” said Leonard Law, senior credit analyst with Lucror Analytics Pte. “The outcome shows that bondholders are keen to have CSC avoid an immediate default, but would still like to negotiate for better terms.”

China South City telegraphed the potential outcome of its last minute talks with creditors, when it said in a Monday filing that it didn’t have enough resources to pay for the interest. The company said it was asking creditors to vote to extend maturity and lower interest on all five dollar bonds in one inclusive agreement.

But creditors’ assent to delay the now-due-2027 note is a separate deal and a consent solicitation in relation to each of the other four notes has lapsed. The 2027 note “is not conditional upon the consummation” of agreements on the other four notes, China South City said in the Wednesday filing.

To obtain the relief measures sought, China South City needed a certain amount of creditor votes — representing at least 75% of the outstanding amount for each of the five dollar bonds — for the plans. As of the voting deadline, holders of 69.87% of the aggregate outstanding principal amount across all five series of notes had voted in favor of the consent solicitation.

China South City still hasn’t acquired enough votes from the bondholders in regards to its four other notes, according to a company filing.

As China South City already received votes around 70%, “it is likely that the company would eventually complete the bond extension exercise,” Law said.

The company — partially owned by Shenzhen SEZ Construction and Development Group Co., a unit of the southern city’s local state asset regulator — was among the first in the country’s property sector to receive a state bailout.

Country Garden, one of China’s largest developers, paid off a bond ahead of schedule last week to prevent its own debt crisis from worsening. A senior Chinese housing official also pledged to help developers avoid a cascade of debt defaults, among the strongest commitments yet to cushion an escalating liquidity crisis.

--With assistance from Lorretta Chen.