Exclusive-Deutsche Bank to file liquidation suit against Chinese developer Shimao, sources say

FILE PHOTO: The logo of property developer Shimao Group is seen on the facade of Shimao Tower in Shanghai, China January 13, 2022. REUTERS/Aly Song/File Photo

By Clare Jim and Xie Yu

HONG KONG (Reuters) – Deutsche Bank is preparing a liquidation lawsuit in Hong Kong against Chinese developer Shimao Group, two sources said, in a rare move by a foreign firm that comes amid rising credit defaults and China’s deepening property sector crisis.

Shanghai-based Shimao is among the many Chinese developers that have defaulted on offshore bonds, after it missed the interest and principal payment for a $1 billion offshore bond in July, 2022.

After that missed payment, its entire $11.7 billion worth of offshore debt is deemed to be in default.

The German bank, which is one of the creditors of Shimao, is looking to file the petition this month after it found the developer’s debt restructuring terms unacceptable, said the two people with knowledge of the matter. Both sources declined to be identified as the matter is not public.

FILE PHOTO: People walk past the logo of property developer Shimao Group near Shimao Tower in Shanghai, China January 13, 2022. REUTERS/Aly Song/File Photo

Deutsche Bank declined to comment. 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 after 18 months of negotiations with them.

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.

China Evergrande Group, the world’s most indebted property developer, was ordered to be liquidated by the Hong Kong court in January, after a city-based creditor filed a lawsuit against the defaulted developer.

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.

LIQUIDATION PETITIONS

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.

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, said the sources.

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.

(Reporting by Clare Jim and Xie Yu in Hong Kong; Editing by Sumeet Chatterjee and Lincoln Feast.)