Germany’s Deutsche Bank gears up for legal battle against a Hong Kong property developer

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In a move amidst China’s deepening property sector crisis, Deutsche Bank is reportedly preparing to launch a liquidation lawsuit against Shanghai-based developer Shimao Group in Hong Kong. This unusual step by the German bank follows Shimao’s default on a $1 billion offshore bond in July 2022, rendering its entire $11.7 billion offshore debt in default.

Sources familiar with the matter revealed that Deutsche Bank, a creditor of Shimao, is dissatisfied with the developer’s proposed debt restructuring terms and is therefore seeking legal recourse. The bank’s credit exposure to Shimao is primarily through private dollar bonds, although the exact amount remains undisclosed.

If Deutsche Bank proceeds with the lawsuit, it would mark a rare instance of a foreign financial institution initiating such action against a Chinese developer since the sector’s descent into crisis in 2021. Notably, China Evergrande Group, the world’s most indebted property developer, was recently ordered to be liquidated by a Hong Kong court, following a lawsuit filed by a city-based creditor. Similarly, a liquidation petition has been filed against Country Garden, another prominent Hong Kong-listed developer.

The surge in liquidation petitions against developers comes at a time when Beijing is endeavoring to revitalize the property sector through a series of support measures. However, these legal actions are likely to compound homebuyers’ concerns regarding the real estate market’s future.

China’s property sector, a key driver of the economy, experienced a liquidity crisis in 2021 due to a regulatory crackdown on excessive debt-fueled construction. Consequently, property sales and new home prices have been adversely affected.

Since the sector crisis began, a growing number of Chinese developers have defaulted on their offshore repayment obligations, prompting many to consider debt restructuring to avoid insolvency. At least 10 Chinese developers in Hong Kong and other overseas courts have faced liquidation petitions thus far.

The escalating number of liquidation petitions against developers is expected to intensify pressure on these companies to propose restructuring plans that are acceptable to creditors. Deutsche Bank’s move follows similar actions by global peers HSBC and Standard Chartered, which incurred substantial write-offs due to their exposure to China’s property sector through local banks.

In the case of Jiayuan International Group Ltd, another Chinese developer ordered to be liquidated by a Hong Kong court, creditor HSBC was among the initial petitioners. Shimao, on the other hand, was the first major Chinese developer to formally engage in negotiations with creditors in 2022 regarding its $11.7 billion offshore debt.

Last December, Shimao proposed a debt restructuring plan aimed at reducing its offshore debt by up to $7 billion. However, creditors have reportedly balked at the proposed 50% haircut to their investments, indicating that an agreement has yet to be reached.

Deutsche Bank’s potential legal action against Shimao underscores the challenges facing Chinese developers amid the ongoing property sector crisis. As the situation unfolds, the industry and its stakeholders are closely watching to see how this legal battle will impact the broader real estate landscape in China.

(Source: Fidelity | BNN | Republic World)

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