China's Country Garden remains silent on grace period for debt repayment

The developer missed interest payments on some dollar bonds earlier this month

Country Garden headquarters in Foshan, China. The Chinese developer is leaving investors in the dark about the exact date on which its grace period for debt repayment ends. Bloomberg

Country Garden Holdings, the beleaguered Chinese developer that missed interest payments on some dollar bonds earlier this month, is leaving investors in the dark about the exact date on which its grace period ends.

This adds to signs of opacity in the nation’s offshore junk debt market, which has lost $87 billion in the past two years.

One of China’s biggest developers, Country Garden must repay a combined $22.5 million in two coupons within the grace period, otherwise creditors could call a default that would be the developer’s first on such debt.

That would threaten an even worse impact than defaulted peer China Evergrande Group, given Country Garden has four times as many projects.

But there’s uncertainty whether the grace period ends on September 5 or September 6, raising the risk of legal wrangling if payment straddles those dates.

The ambiguity stems from differing interpretations of standard wording in the offering memorandum.

The document defines an “event of default” as delinquency “in payment of interest which continues for 30 days”.

What makes things uncertain is that the due date of August 6 was a Sunday, which meant the effective due date was the next business day, August 7.

The document doesn’t specify whether the 30-day grace period should be counted from August 6 or August 7. Country Garden declined to comment.

China’s worsening property debt crisis has prompted a slew of developers, including Evergrande, to use grace periods in recent years. In many cases, doing so has only bought time before they eventually went on to default, adding to record debt failures.

Growing concerns that the same fate could strike Country Garden, which had 1.4 trillion yuan ($192 billion) of total liabilities at the end of last year, have dragged Chinese junk dollar bonds deeper into distress under 65 cents.

The market value of Bloomberg’s index for the securities, mostly issued by builders, has shrunk to only about $44.7 billion from $131.8 billion two years ago.

Lack of clarifications from Country Garden on its missed interest payments and more generally on its debt plans make it hard to gauge recovery and derive fair value

Zerlina Zeng,
senior credit analyst, CreditSights

Lack of clarifications from Country Garden or involved parties on the builder’s missed interest payments and more generally on its debt plans make “it hard to gauge recovery and derive fair value”, said Zerlina Zeng, senior credit analyst at CreditSights.

“This probably also contributes to the poor trading liquidity of these high-yield, distressed China property bonds.”

Several analysts at major global banks have recently mentioned in notes either September 5 or September 6 as the deadline for the end of the grace period, underscoring the lack of consensus.

“We believe we should use the scheduled payment date as day 0, but we are not certain given it was Sunday,” Moody’s Investors Service said when asked about the matter.

The rating firm downgraded Country Garden deeper into junk territory at Caa1 earlier this month.

The trustee for the bond, Citicorp International, also declined to comment.

If the developer does not pay the interest, the confusion over the expiry date of the grace period will cede to broader concerns.

Creditors would then focus on how much they may eventually recover through potential restructuring, should the company follow its peers down that path.

Country Garden, helmed by one of China’s richest women Yang Huiyan, has made no public comments directly concerning its missed dollar note interest payments or whether it plans to repay within the grace period.

The company apologised more generally earlier this month, vowing to take more powerful and effective measures to ensure home delivery and address periodic liquidity stress.

The coupon payments in question are $10.5 million of interest on a dollar bond that matures in 2026, and $12 million on a note due in 2030.