(Bloomberg) -- A Chinese developer partially owned by the southern city of Shenzhen warned it can’t pay interest due Wednesday as it races to win support from creditors to extend dollar bond deadlines, raising the risk of its first default.

China South City Holdings Ltd. said in a stock exchange filing that it doesn’t have the resources to pay the interest of its 9% notes due July 2024 — with $235 million of principal outstanding — by the end of a grace period Dec. 20, citing liquidity and cash flow constraints from deteriorating operating environment affecting the real estate sector.

The builder said holders of 69.8% of aggregate outstanding principal amount of its notes have voted in favor of its request to extend the maturity and lower the interest rates of five dollar bonds due in 2024 — which collectively have $1.35 billion of principal outstanding. That’s still short of the no less than 75% in aggregate outstanding principal amount needed for each of the five dollar bonds to successfully extend the maturity and lower the interest rates. 

All of that is creating one of the first major tests of Chinese authorities’ support for distressed property firms after more recent vows to curb an unprecedented wave of defaults. China will “forcefully prevent developers from defaulting on their debts all at once,” said Dong Jianguo, Vice Minister of Housing and Urban-Rural Development, state broadcaster China Central Television reported earlier this month.

China South City — partially owned by the Shenzhen SEZ Construction and Development Group Co., a unit of the southern Chinese city’s local state asset regulator — was among the first in China’s property sector to receive a state bailout. The Shenzhen state-owned firm bought a 29% stake in the developer in May 2022 and is now the single largest shareholder of China South City. China South City said it has been “in continuing discussions” with Shenzhen SEZ Construction and Development. 

The developer’s extension comes despite the bond’s keepwell clauses provided by the Shenzhen state asset regulator affiliate. Keepwell provisions are a sort of gentleman’s agreement that entails a commitment to maintain an issuer’s solvency, but stop short of a payment guarantee from the parent company.

Earlier this month, the company offered improved terms of consent and said it will implement a mandatory redemption obligation. Under the obligation terms, the company on Jan. 31 will redeem 4% of aggregate principal amount of each series of notes outstanding on payment date respectively.

(Updates with dollar bond principal in second paragraph)

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