Country Garden’s (2007.HK) entire offshore debt is on the verge of being declared in default if the largest private property developer in China fails to make a $15 million coupon payment on Tuesday. This payment deadline marks the end of a 30-day grace period, and non-payment of this tranche will trigger cross defaults in other bonds as per standard bond contracts.
With nearly $11 billion in offshore bonds and $6 billion in offshore loans, a default by Country Garden could pave the way for one of China’s most significant corporate debt restructurings. This situation unfolds against the backdrop of a deepening crisis in China’s property sector, which is dragging on economic growth.
Chris Beddor, Deputy Director of China Research at Gavekal Dragonomics, remarked, “I think it’s a really high-profile and visceral reminder of just how bad things are for the developers, but the private-sector developers in particular.”
The lack of payment, which was expected after Country Garden’s warning last week about its inability to meet offshore debt obligations, would make the company the latest in a series of Chinese developers to default. In recent weeks, Country Garden has also missed other offshore payments, though those payments have not yet reached their 30-day grace periods.
A source familiar with the situation informed Reuters that the coupon payment had not been made by 1400 GMT. Country Garden declined to comment on the matter.
The property sector crisis has made investors extremely nervous, as evidenced by another major property developer, Gemdale (600383.SS), witnessing a significant drop in its stocks and bonds following the resignation of its chairman. While Gemdale attributed the resignation to health reasons, investors, spooked by the sector’s broader problems, wasted no time in selling its securities, causing its stock to plummet by 9%. Moody’s downgraded Gemdale to B3 from Ba3 with a negative outlook, and Fitch downgraded state-backed China Vanke (000002.SZ) and state-owned Poly Developments and Holdings (600048.SS) from BBB+ to BBB, citing higher leverage. Fitch also noted that China Vanke’s recent sales performance was weaker than expected, which could dampen cash generation and its deleveraging effort.
In mainland China, Evergrande Group (3333.HK), at the epicenter of the debt crisis, announced its plan to hold a bondholder meeting to approve a proposal to delay the buyback date for a 2.1 billion yuan ($287.11 million) puttable bond by one year to October 2024. It also proposed another delay, this time for the interest payments accrued between October 2021 and April 2023 for the bond maturing in October 2025, extending the payment date by six months to October 2024.
Widespread defaults have been a prevailing trend in the Chinese property market, with developers responsible for 40% of Chinese home sales having defaulted on their debt obligations since 2021, according to JPMorgan. CreditSights data show that Chinese developers have defaulted on more than $114.6 billion of the $175 billion in dollar bonds outstanding since 2021.
As more developers move towards debt restructuring, offshore creditors are expected to be offered less favorable terms, reflecting the worsening outlook for China’s real estate sector. In response to these challenges, Country Garden has enlisted the services of financial advisory firm Houlihan Lokey, China International Capital Corporation (CICC), and law firm Sidley Austin to examine its capital structure and liquidity position and formulate a comprehensive solution.
Last week, Kingboard Holdings (0148.HK), a printed circuit board maker, became one of the first known listed companies to take legal action against Country Garden. A unit of Kingboard Holdings, owed HK$1.6 billion ($204 million), issued a statutory demand seeking repayment. Chinese courts have also ordered a freeze on 63.68 million yuan worth of shares in two units of Country Garden Services (6098.HK), a sister company of the embattled developer, until October 2026, according to company filings portal Tianyancha on Tuesday.
To counter the property market crisis, China has implemented a series of support measures in recent months aimed at revitalizing the sector. This industry, which accounts for a quarter of the Chinese economy, has been in turmoil since regulators began cracking down on the industry’s high debt levels in 2021.
However, analysts remain skeptical that the new measures will be sufficient to turn the sector around in the near future. This week, industry data will be closely watched to gauge the impact of these measures, including property sales by floor area set to be released on Wednesday and nationwide prices of new homes for September, which will be released on Thursday.
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