The offshore debt crisis in China’s real estate sector deepens as Country Garden (2007.HK), the nation’s largest private property developer, has allowed a $15 million coupon payment deadline to expire without any indication of payment. This move has triggered concerns that the company may have defaulted on its offshore debt obligations, potentially setting the stage for one of China’s most significant corporate debt restructurings.
A default by Country Garden could lead to cross defaults in other bonds issued by the company, as stipulated in standard bond contracts. The company currently holds nearly $11 billion in offshore bonds, making it a critical player in China’s real estate market.
As the deadline passed with no payment, bondholders and financial analysts raised questions about the company’s financial stability. A bondholder who preferred to remain anonymous disclosed that they had not received payment on the coupon after the 30-day grace period had ended. Another source confirmed to Reuters that the coupon payment had not been made by 1300 GMT.
On Wednesday, Country Garden issued a statement reiterating its inability to meet all its offshore debt obligations and expressed hopes of finding a “holistic” solution to its financial difficulties. However, the statement did not directly address the issue of a default, and company representatives declined to comment on the matter.
Cedric Rimaud, an analyst at GimmeCredit, an independent corporate bond research house, emphasized the significance of the missed payment, stating, “If they don’t pay within the grace period, it will be a default.”
The default concerns surrounding Country Garden come in the midst of a broader crisis in the Chinese real estate sector, which has been grappling with liquidity problems since 2021 when the government implemented measures to address the industry’s exceedingly high debt levels. Real estate accounts for a significant portion of China’s economic activity, contributing to one-fourth of the nation’s economic output, and its persistent struggles have had ripple effects on the world’s second-largest economy, often sending shockwaves through global financial markets.
Notably, Country Garden’s missed payment follows an investigation into the chairman of China Evergrande (3333.HK), another beleaguered property developer that has already defaulted and played a central role in the sector’s ongoing debt crisis.
Fern Wang, a senior analyst at KT Capital Group, remarked on the differences between Country Garden and Evergrande, noting that the former has been the “better child” in terms of meeting debt ratio requirements introduced in 2021, while Evergrande failed on all fronts.
However, even relatively healthy developers like Country Garden have been struggling due to sluggish demand for homes and declining property prices amid a broader economic downturn. This year, the firm’s shares have seen a precipitous decline, losing approximately 70% of their value, though they experienced a slight uptick on Wednesday, rising by 2.7%.
Country Garden’s dollar bonds have also seen a significant drop in value, currently trading at about 6 cents compared to 70 cents at the beginning of the year, as reported by LSEG data. Bondholders are now anticipating a debt restructuring, and some are willing to accept losses in exchange for a more efficient and less painful restructuring process when compared to the troubled Evergrande.
Nicholas Chen, an analyst at CreditSights, predicts that a debt restructuring for Country Garden is likely to entail a lengthy waiting period for creditors, citing the example of peer company Sunac (1918.HK), whose recently approved restructuring process took at least 1.5 years.
While Country Garden is grappling with offshore debt issues, it appears to be in a better position with its onshore debt, having secured three-year payment extensions for eight bonds valued at 10.8 billion yuan ($1.5 billion).
The ongoing challenges in the Chinese real estate market continue to impact other developers, such as Gemdale (600383.SS), which has seen its bonds slide following the resignation of its chairman, sparking fears of financial trouble. Gemdale has attributed the chairman’s resignation to health reasons and reassured that it would not significantly impact its operations.
In an effort to revive the property market, China has rolled out a series of support measures in recent months. However, the positive effects of these measures have yet to materialize. Data released on Wednesday showed a 9.1% decline in property investment in China during the first nine months of the year, with sales by floor area dropping by 7.5%.
Market observers are now eagerly awaiting the release of nationwide prices for new homes for September. The data for August revealed a 0.3% month-on-month drop, marking the fastest decline in 10 months.
The bleak outlook for China’s property market is expected to worsen the terms that offshore creditors may need to accept as debt restructuring becomes increasingly likely.
According to JPMorgan, developers accounting for 40% of Chinese home sales have defaulted on their debt obligations since 2021. Most of these companies, primarily private enterprises, have issued approximately $110 billion worth of high-yield offshore bonds, further underscoring the magnitude of the challenges facing the Chinese real estate sector.
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