Developer China South City warns of default on bond restructuring deadline day

China South City Holdings said it would not have enough cash to pay interest on its foreign-currency debt this month, as the property developer struggles to win the necessary support from creditors to restructure five bonds totalling US$1.35 billion maturing in 2024.

The state-backed developer said holders of 69.8 per cent of the bonds on aggregate have voted in favour of its proposals to extend the bond maturities and halve their coupon rates, according to a stock exchange filing on Monday. Consent for one of the five bonds has surpassed the 75 per cent threshold, it added, refuting a media report.

The five dollar bonds each mature in April, June, July, October and December next year. China South City started its consent process on December 4, asking bondholders to extend the maturities by 33 to 39 months, and halve the annual coupon rate to 4.5 per cent, according to its proposals.

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“We have not made an interest payment due on November 20 with respect to the July 2024 notes, which would lead to an event of default on December 20 [after the 30-day grace period],” it said in the filing. “As such, if the requisite consents are not received by December 20, it may trigger an event of default under other indebtedness.”

The stock fell tumbled 4.7 per cent to HK$0.30 on Monday, extending the loss this year to 46 per cent. A gauge tracking mainland Chinese developers listed in Hong Kong lost 2.5 per cent.

The warning came before a Monday deadline for creditors to approve its proposals. The developer has extended the closing date twice, the latest to 4pm London time on December 18, while also increasing the incentive fee for bondholders to accept the revised bond terms.

Haitong International and China Citic Bank International are helping the developer as consent solicitation agents.

Like many of its bigger peers, China South City fell into distress as the pandemic struck, home sales slumped and the Chinese government tightened lending to over-geared home builders. Apart from the offshore bonds, the firm also has 500 million yuan (US$70 million) of loans to repay onshore banks this month, it added.

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Having a solid financial backer has not prevented the developer from a liquidity crunch. Shenzhen SEZ Construction and Development Group, an entity owned by the city’s asset regulator, is a major shareholder of China South City with a 29.3 per cent stake held through an asset-transfer plan in May 2022.

“Reduced bank lending for real estate development has adversely affected access to onshore capital,” the company said earlier this month. “Reduced bank lending for mortgage finance for buyers, combined with buyers’ concerns about the ability of property developers to complete projects, has adversely affected property sales.”

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In addition, the recent depreciation of yuan has eroded the company’s ability to repay its dollar-denominated debts, it said. The yuan slumped to a 16-year low against the US dollar last quarter.

China South City issued a profit warning late last month. It expected about HK$600 million (US$76.7 million) loss for the six months to September 30, citing lower rental income, fair-value loss in investment properties and higher financing costs, among others.

More analysts are becoming bearish on China’s property market outlook. CGS-CIMB Securities is the latest to downgrade the sector, citing unresolved sector liquidity issues and developers’ weak sales and profit outlook.

“Weaker-than-expected contracted sales for developers and tighter control of presales escrow accounts have further worsened their financial positions,” Raymond Cheng, managing director and head of China and Hong Kong property at CGS-CIMB, said in a report on Friday.