Chinese developer Country Garden signals possibility of default

The company, which has more than 3,000 housing projects in smaller cities, has been engulfed in a property debt crisis

A residential complex built by Country Garden is seen in Nanjing, in China's eastern Jiangsu province. AFP
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Chinese developer Country Garden Holdings ramped up warnings that it’s set for its first-ever default and hired advisers, the strongest indications yet that the company is headed for a restructuring.

The company missed initial deadlines last month to pay interest on two dollar bonds, and grace periods are respectively set to end October 17-18 and October 27. It has $11 billion of offshore bonds outstanding, according to data compiled by Bloomberg.

The builder “expects that it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, including but not limited to those under the US dollar notes issued by the company”, it said in a filing on Tuesday.

“Such non-payment may lead to relevant creditors of the group demanding acceleration of payment of the relevant indebtedness owed to them or pursuing enforcement action.”

Country Garden, which has become a symbol of China’s broader property debt crisis, said that it had not made a due payment of 470 million Hong Kong dollars ($60 million) “under certain of its indebtedness”.

Tuesday’s filing “may pressure the offshore bondholders to approve any upcoming restructuring proposal”, said Ting Meng, a senior credit strategist at Australia and New Zealand Banking Group.

Once China’s largest developer, Country Garden has been engulfed in a broader property debt crisis and has warned in recent months that it may default.

Fresh concerns about financial market contagion from China’s property sector flared in August when the firm missed paying interest on dollar bonds by an initial deadline. While it went on to meet those obligations within a grace period, it has since missed more initial deadlines and it has not commented publicly on its prospects for honouring those debts.

Helmed by one of China’s richest women, Yang Huiyan, the builder is important to the nation’s economy due to its sheer size. Country Garden has more than 3,000 housing projects in smaller cities and about 70,000 employees. As such, turmoil at the firm could lead to a worse outcome than from 2021’s debt failure at distressed peer China Evergrande Group given it has four times the number of projects.

In a sign that Country Garden’s debt woes are affecting prospective homebuyers’ confidence. The company said on Tuesday that September contracted sales plunged 81 per cent from a year earlier.

Declines have been accelerating in recent months, with August’s 72 per cent drop following decreases in excess of 50 per cent in June and July.

Distress runs deep at Country Garden, one of the world’s most heavily indebted developers with 1.36 trillion yuan ($187 billion) of total liabilities. Its dollar bonds are indicated in a range of 5 to 7 cents, indicating how little holders expect to recover in any eventual restructuring.

ANZ’s Ms Meng said the firm’s base case is that the dollar-bond coupons that were initially due last month will get paid during the grace periods.

For upcoming maturities, including a 3 billion Hong Kong dollar note in December and a $1 billion bond in January, “the company will need to negotiate with bondholders for an offshore-debt restructuring plan”, she said.

Country Garden also said on Tuesday that it hired advisers, a step that distressed companies often take as they gear up to seek a broader debt restructuring.

It has engaged China International Capital Corporation Hong Kong Securities and Houlihan Lokey (China) as joint financial advisers and Sidley Austin as legal adviser.

They will “evaluate the capital structure and liquidity of the group and formulate a holistic solution”, the developer said.

Country Garden was in talks with Houlihan Lokey and CICC for both to become financial advisers and put together an offshore debt restructuring plan, sources said last month.

Creditors of Country Garden have been in discussions with several financial advisers who are separately seeking to form an ad hoc group ahead of a possible restructuring.

PJT Partners and Moelis have been talking with various creditors, sources said earlier this week.

No decisions have been made by creditors, the people added.

Updated: October 10, 2023, 5:36 AM