Country Garden fails to make bond payments amid China property concerns

Country Garden fails to make bond payments amid China property concerns

Country Garden Faces Repayment Troubles, Adding to China’s Property Sector Crisis

In the midst of China’s ongoing property sector crisis, Country Garden, the largest privately owned developer in the country, recently confirmed market fears that it is facing repayment troubles. On August 6, the company failed to make a $22.5 million payment for two dollar bond coupons, raising concerns about its financial stability.

The bonds in question are notes due in February 2026 and August 2030, and both payments have a grace period of 30 days. This default by Country Garden adds to a string of debt defaults seen in China’s giant property sector since late 2021. The sector has been struggling with cash-squeezed developers, with China Evergrande Group, the world’s most indebted property developer, at the epicenter of the crisis.

Country Garden, which had total liabilities of 1.4 trillion yuan ($194 billion) at the end of 2022, has significant exposure in lower-tier cities. The company stated that it is actively working on improving its capital arrangements to ensure the legal rights of its creditors. However, it acknowledged that its usable cash had declined, reflecting “periodic liquidity stress” caused by a deterioration in the sales and refinancing environment, as well as the impact of various fund regulations.

Despite its efforts to weather these “unprecedented difficulties,” Country Garden’s shares listed in Hong Kong plummeted 14.4%, experiencing their biggest daily drop since December. Additionally, most of its dollar bonds sank to below 10 cents on the dollar, indicating the market’s lack of confidence in the company.

Analysts have pointed out that the fact that Country Garden is struggling with an interest payment, rather than a full bond principal repayment, reveals its extremely tight liquidity situation. This event could have a negative spillover effect on the sector, particularly affecting investor sentiment towards other privately-run developers that are still afloat, according to CreditSight analyst Nicholas Chen.

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The volatility of property shares in recent weeks has been largely driven by contagion worries, sparked by liquidity concerns over Country Garden’s financial woes. State-backed Sino-Ocean Group’s efforts to extend bond payments have also contributed to apprehension among investors. As a result, market participants are closely watching policymakers for more drastic support measures for the troubled sector.

Country Garden’s contracted sales have already dropped 30% to 128.8 billion yuan in the first six months of this year, reflecting the accelerating decline in the broader property sector. Moody’s downgraded the company’s rating to “B1” last week, highlighting its limited funding access and significant maturing debt in the next 12-18 months.

Looking ahead, Country Garden faces upcoming bond maturities and coupon payments. In September, a 5.8 billion yuan bond is set to mature, along with a 48 million yuan coupon payment and put options on a further 3.4 billion yuan of paper. Offshore, the company has a HK$3 billion ($384.2 million) convertible bond maturing in December and a $1 billion dollar bond in January.

The company’s financial struggles were further highlighted last week when it unexpectedly canceled a $300 million share placement, citing a lack of a final agreement for the deal to proceed. Additionally, Country Garden warned that it would report an unaudited net loss for the six months ending June 30, compared to a net profit of 1,910 million yuan in the previous year.

As the situation with Country Garden unfolds, it adds to the growing challenges in China’s property sector. The Chinese government faces the task of balancing adequate support for the sector while addressing issues of oversupply and excessive debt. The resolution of this crisis will have far-reaching implications for both the country’s economy and global financial markets.

Note: The exchange rates mentioned in this article are accurate as of the time of writing. ($1 = 7.2117 Chinese yuan renminbi; $1 = 7.8088 Hong Kong dollars)

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