State Firm Buys China South City Stake in Developer Bailout

(Bloomberg) -- A Chinese state-run enterprise will buy into struggling developer China South City Holdings Ltd., as Beijing moves to limit the fallout from a widening debt crisis engulfing the country's real estate industry.

Shenzhen SEZ Construction and Development Group Co., a unit of the southern Chinese city's local state asset regulator, has agreed to pay HK$1.91 billion ($245 million) for a 29% stake in the Hong Kong-listed developer, the latter said in a stock exchange filing Friday.

The effective bailout is the latest move by the authorities to prevent an unprecedented cash crunch in the nation's property sector from hurting economic growth and threatening financial and social stability. Policymakers have taken steps ranging from easing property financing conditions to encouraging financially healthier companies to acquire assets from troubled developers.

The investment “looks like a rescue by the state and may be very positive for CSC's dollar notes,” Andrew Chan, analyst with Bloomberg Intelligence, wrote in a note, referring to China South City. “It seems likely CSC will be able to obtain liquidity from state banks to repay all its outstanding dollar notes and remain a performing credit.”

China South City has three dollar bonds totaling $970.5 million that will mature in 2022, according to data compiled by Bloomberg. The developer's 10.75% dollar note due April 2023 rose 33.8 cents on the dollar to 70.3 cents as of 4:22 p.m. in Hong Kong Friday, set for its biggest daily rise on record. Its shares closed up 5.8% Friday, outpacing the 1.7% gain by a Bloomberg gauge of Chinese developers.

Shen Jiajie, an analyst at Capital Securities, attributed the sector's rally also to comments by central bank official Zou Lan on Thursday that the People's Bank of China is encouraging mergers and acquisitions in the real estate sector to resolve risks. “It's evidence that China will give some support to underpin the industry,” Shen said.


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Headquartered in Shenzhen, China South City said it has agreed to issue 3.35 billion new shares at HK$0.57 apiece, a 17.4% discount to its last closing share price, to Shenzhen SEZ Construction and Development Group. Proceeds will be used for repaying existing debt and general corporate purposes.

The state firm will become the developer's single largest shareholder after the deal, according to the filing.

The investment “would enhance the company's financial strength and financing capabilities, and provide the company with an opportunity to broaden its shareholder and capital base, lower financing costs and improve debt maturity profile,” China South City said in the filing.

Earlier this month, S&P Global Ratings cut China South City's credit rating to B- from B, saying its negative outlook on the firm reflects the expectation that the developer's liquidity will remain tight if it fails to execute its plans in a timely manner. The risk assessor has since withdrawn its ratings at the company's request.

With assistance from Bloomberg