Country Garden default talk swirls as offshore debt deadline passes

By Reuters   October 18, 2023 | 12:42 am PT
Country Garden default talk swirls as offshore debt deadline passes
A worker looks on at a construction site of residential buildings by Chinese developer Country Garden, in Beijing, China August 11, 2023. Photo by Reuters/Tingshu Wang
A Country Garden $15 million coupon payment deadline has expired without word of payment, fuelling expectations that China's biggest private property developer has defaulted on its offshore debt as the nation's real estate woes deepen.

Non-payment would trigger cross defaults in other Country Garden bonds as is standard in bond contracts. The company has almost $11 billion of offshore bonds and a default would set the stage for one of China's biggest corporate debt restructurings.

One bondholder of the tranche in question, who declined to be identified discussing confidential information, said he had not received payment on the coupon as a 30-day grace period ended.

Country Garden reiterated on Wednesday that it expects to be unable to meet all of its offshore debt obligations and hopes to seek a "holistic" solution to its difficulties.

Its statement did not directly address the question of whether there had been a default and representatives of the company declined to comment.

"If they don't pay within the grace period, it will be a default," said Cedric Rimaud, analyst at GimmeCredit, an independent corporate bond research house, referring to Country Garden's missed payment.

Scores of other Chinese property developers have defaulted, reeling from liquidity problems since 2021 when the government introduced measures to rein in the sector's very high debt levels.

The industry accounts for one-fourth of China's economic activity and its prolonged woes have dragged on the world's second-biggest economy, often rattling global financial markets.

Country Garden's missed payment comes on the heels of an investigation into the chairman of beleaguered peer China Evergrande, which has also defaulted and has been at the centre of the sector's debt crisis.

Shares in Country Garden have lost some 70% of their value this year but gained some ground on Wednesday, rising 2.7%.

Its dollar bonds are currently worth about 6 cents compared with 70 cents at the start of the year, according to LSEG data, and bondholders say they expect the debt to be restructured.

"I think Country Garden offshore US dollar bond pricing speaks for itself as to the current expectations," said Real Estate Foresight co-founder Robert Ciemniak who publishes on Smartkarma.

A U.S. asset manager holding Country Garden's dollar bonds added: "We are ready to walk away with some losses, but just hope the restructuring process could be efficient and less painful when compared to other companies like Evergrande."

The asset manager declined to be identified.

Country Garden is, however, in better shape with its onshore debt, having gained some breathing room with three-year payment extensions for eight bonds worth 10.8 billion yuan ($1.5 billion).

China has rolled out a flurry of support measures in recent months to revive the property market but private developers are still struggling to source new capital, according to a CreditSights report published on Tuesday.

"With homebuyers still biased towards state-linked developers, those privately-run developers still not yet in a default would likely find staying afloat an increasingly challenging prospect, squeezed by both insufficient contracted sales generation and funding inaccessibility," the report said.

China's bleak property market outlook is likely to worsen the terms that offshore creditors may have to accept as debt is restructured.

Data on Wednesday showed property investment in China slid 9.1% for the first nine months of the year. Sales by floor area dropped 7.5%.

Nationwide prices of new homes for September will be released on Thursday. August data showed a 0.3% drop month on month, the fastest pace in 10 months.

Developers accounting for 40% of Chinese home sales have defaulted on their debt obligations since 2021, according to JPMorgan. Those companies, mostly private, have issued around $110 billion worth of high-yield offshore bonds.

Hong Kong's Hang Seng Mainland Properties Index is down 40% so far this year.

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