In Hong Kong, two sources report that Deutsche Bank is getting ready to file a Liquidation Suit Against Shimao Group. This move by the foreign firm is rare and occurs amidst increasing credit defaults and China’s worsening property sector crisis.

Deutsche Bank Plans to File a Liquidation Suit Against Shimao
Deutsche Bank Plans to File a Liquidation Suit Against Shimao

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

Deutsche Bank Plans to File a Liquidation Suit Against Shimao

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

The German bank, a creditor of Shimao, plans to file the petition this month because it found the developer’s debt restructuring terms unacceptable, according to two individuals familiar with the situation. They declined to be identified since the matter is not public.

Deutsche Bank chose not to comment. Shimao did not respond to queries from Reuters.

Recent Developments in China’s Property Sector

Shimao, once ranked among the top 20 developers in China, shared its offshore debt restructuring terms with creditors last December after negotiating with them for 18 months.

According to one source, Deutsche Bank’s credit exposure to Shimao is tied to private dollar bonds. Reuters was unable to ascertain the extent of Deutsche Bank’s exposure to the developer.

If Deutsche Bank proceeds with the move, it will mark a rare instance of a major foreign financial firm initiating a liquidation lawsuit against a Chinese developer since the sector fell into a debt crisis in 2021.

In January, the Hong Kong court ordered the liquidation of China Evergrande Group (3333.HK), the world’s most indebted property developer, following a lawsuit filed by a creditor based in the city.

Additionally, another Hong Kong-listed company has filed a liquidation petition against Country Garden (2007.HK) after it failed to meet repayment obligations, as announced by China’s largest private property developer this week.

The rise in liquidation petitions against developers coincides with Beijing’s efforts to revitalize the property sector through various support measures. This situation is likely to compound homebuyers’ concerns about the future of real estate firms.

Petitions for Liquidation

In 2021, China’s property sector, a crucial component of the world’s second-largest economy, plunged into a severe liquidity crisis due to a regulatory crackdown on a debt-driven construction boom. This crackdown has led to a decline in property sales and new home prices.

Since then, an increasing number of private developers have defaulted on their offshore repayment obligations. Many of them have been actively preparing to restructure their debt to remain solvent.

According to Reuters’ calculation, at least 10 Chinese developers in Hong Kong and other overseas courts have faced liquidation petitions since the onset of the sector crisis.

Analysts suggest that the growing number of liquidation petitions against developers will pressure the companies to formulate restructuring proposals that are acceptable to creditors.

Financial Actions in China’s Property Market

Deutsche Bank’s plan follows similar actions by global peers HSBC and Standard Chartered, who have incurred significant write-offs due to their exposure to China’s property sector through investments in local banks.

However, the filing of a liquidation petition by Deutsche Bank would be uncommon.

In the case of Jiayuan International Group Ltd, another Chinese developer facing liquidation ordered by the Hong Kong court, creditor HSBC was among the early petitioners against the company.

Shimao was the first major Chinese developer to initiate formal negotiations on restructuring terms with creditors in 2022 for its $11.7 billion worth of offshore debt.

According to the sources, in December last year, Shimao revised its debt restructuring plan. The plan aimed to reduce its offshore debt by up to $7 billion by exchanging some debt for new loans with maturities of up to nine years, among other proposals.

The sources also mentioned that Shimao has not yet reached an agreement with creditors on the new terms. Creditors are unwilling to accept the proposed 50% reduction in the value of their investments.

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By Dee

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