What Follows Country Garden’s Dollar Bond Default?

Buildings of China's developer Country Garden Holdings in Suqian, in China's eastern Jiangsu Province, on Oct. 18, 2023. STR/AFP via Getty Images

News Analysis

Country Garden (Cogard), once regarded as one of China’s most reliable property developers, missed the payment deadline on its dollar bond interest on Wednesday.

The failure to deliver a $15.4 million coupon payment on an outstanding dollar bond resulted in cross defaults across Country Garden’s other bonds. Bondholders have been organizing discussions to urgently address the situation with the company, leaving stakeholders wondering what lies ahead.

This failure could set off a chain reaction of defaults on Country Garden’s other overseas liabilities. According to official estimates, the company had over $15.2 billion in outstanding international debts and loans at the end of June. It is one of dozens of other Chinese property firms, including Evergrande, wobbling to stay afloat as its cash crunch worsens daily.

The offshore debts aside, Country Garden owed the equivalent of $187 billion to creditors as of June, which includes contract liabilities amounting to $83 billion, the majority of which was the value of units it had yet to deliver to homebuyers.

In a filing with the Hong Kong Stock Exchange earlier this month, Country Garden stated that it had failed to make a $60 million principal payment and did not anticipate meeting all payment commitments outside of China when due or within assigned grace periods.

“The focus is now on how Cogard’s debt restructuring will proceed from here, [while] the company has engaged CICC [China International Capital Corporation] and Houlihan Lokey as joint financial advisor[s] as well as Sidley Austin as its Legal advisors,” according to an analysts’ note by CreditSights, accessed by The Epoch Times.

Country Garden announced last week that “given China’s property sector has undergone profound adjustments, since the beginning of 2023, the Group’s sales have been under remarkable pressure.” As a result, its bonds are currently trading around 5 cents to 6 cents. “This reflects the market’s expectation of an imminent debt restructuring,” the note said.

“[But] looking at other developers, [for example], Sunac Offshores’ restructuring took 1.5 years to implement, Kaisa’s proposal was rejected by creditors this month and Evergrande’s restructuring has stalled pending an investigation into its offshore unit and various current and former executives, the road to restructuring is likely to be long and bumpy,” the note added.

Yet, up until about a year ago, Beijing hailed Country Garden as an exemplary developer. In late 2022, it sold shares in Hong Kong and used financing from state-owned banks to support its operations.

Since the beginning of the year, though, its Hong Kong-traded shares have dropped 72 percent.

Challenging Market

Country Garden’s loan default highlights the severity of the slump in China’s property market, which was once a major driver of economic growth. China’s economy has struggled to recover from tight zero-COVID regulations, and the property downturn has only made things worse this year.

While Beijing has been attempting to restore the crisis-hit property sector, the National Bureau of Statistics (NBS) data released on Thursday revealed that new home prices in China declined for the third consecutive month in September. According to the official data, the monthly decline in the price of new homes was 0.2 percent in September, down from 0.3 percent in August. Similar to August, year-over-year prices fell by 0.1 percent.

Similarly, volume-wise, the growth of new home sales plunged by more than 10 percent year-on-year, while the growth of property investments worsened to minus 11.2 percent from minus 10.9 percent in September, reported NBS.

Beijing initiated a new round of real property easing in late August in response to the worsening property collapse and the rising property credit fallout since the middle of the month.

However, cutting mortgage rates, lowering down payment ratios, and easing restrictions on home transactions were not enough.

“Some investors worry these policies will intensify the divergence of home prices between higher- and lower-tier cities. It should come as no surprise that [Cogard’s] sales momentum is likely to remain weak based on prevailing market dynamics,” said investment bank HSBC in a client note accessed by The Epoch Times

Holistic Debt Restructuring Expected

Nevertheless, in a Hong Kong stock exchange filing, Country Garden assured its investors that it intends to release some of the money held in escrow by finishing and delivering the homes it has presold. Debts could be settled with those receipts, it added. Still, the company did not reveal the amount of money it had in escrow.

“We believe Cogard will pursue holistic debt restructuring on its offshore [dollar] bond as well as [dollar] bank loans,” said the HSBC note.

Meanwhile, Reuters reported on Thursday that Country Garden’s bondholders are setting up groups and seeking urgent discussions with the troubled property developer after it missed the $15 million coupon payment. Two bondholder groups have emerged to seek discussions surrounding a potential debt restructuring package, with one of the largest groups close to appointing Moelis or PJT as financial advisers, according to the news agency’s sources.

The approval of the restructuring plan may allow the developer to dispose of assets while continuing to operate, which may help to stabilize the market in the medium term, HSBC added.