In China, Country Garden’s troubles mount after it misses offshore bond interest payment
AS CHINA’S property crisis deepens, fears are growing that the next casualty could be Country Garden Holdings, one of the few private property developers to have so far managed to avoid defaulting on its bonds.
Chaired by Yang Huiyan, formerly China’s richest woman, the Guangdong-based company failed to make interest payments totalling US$45 million on two offshore US dollar bonds that were due on Monday (Aug 7), several Hong Kong-based investors told Caixin.
One said the developer now has a grace period of 30 days to make the payments and if it fails to do so within that time, it will be in breach of the terms of the bonds.
Country Garden did not give an official response to a request for comment. Sources with ties to the company confirmed the investors’ claims.
Speculation has been growing that the Hong Kong-traded developer, which focuses on building housing in third- and fourth-tier cities, was in financial trouble. Its shares have fallen from HK$3.24 in late January – when hopes were high that China’s economy and housing sales would recover after “zero-Covid” policies were scrapped – to HK$1.58 at the end of July as it became increasingly clear that the property slump was deepening.
The company warned on Jul 31 that it would report a loss for the first half of the year, citing falling profit margins in its real estate business, higher impairment charges for its housing projects amid a downturn in sales, and foreign exchange losses due to exchange rate volatility. The company recorded a loss attributable to shareholders of 6.1 billion yuan (S$1.14 billion) in 2022 – the first since its listing in 2007.
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Country Garden did not disclose the scale of the expected first-half loss, but the slump in housing sales suggests it could be significant. Stock exchange filings show its sales in the first six months fell 30 per cent year-on-year to 128.8 billion yuan.
Concerns grow
The developer also said it will actively consider taking various countermeasures to ensure the security of cash flow, including but not limited to reducing various operating expenses, accelerating loan collection arrangements, actively expanding financing channels, and managing and optimising debt repayment arrangements. Meanwhile, it will actively seek guidance and support from the government and regulatory authorities.
Since the announcement, Country Garden’s shares have continued to drop and closed on Tuesday at HK$1.13.
Prices of its onshore and offshore bonds have also been falling, and yields have been rising as concern grows about its ability to pay its liabilities. One of the offshore bonds, maturing in January next year, was trading on Tuesday at 22.8 US cents on the dollar, down more than 70 per cent from mid-June, while the price of one of its yuan-denominated bonds maturing in 2026 had fallen to 25.4 yuan on Tuesday from a peak of 97.5 yuan in January.
However, sources told Caixin that Guangdong Tengyue Construction Engineering, a subsidiary of Country Garden, did manage to repay 800 million yuan on an onshore yuan-denominated medium-term note on Monday after bondholders exercised a put option, which gives them the right to demand that the issuer pay back the principal before the bond matures.
But that offered little reassurance to Country Garden’s bond investors. A number of its yuan-denominated bonds fell more than 10 per cent on Tuesday, with a few tumbling more than 20 per cent.
“Cash flow is negative each month, and debt must be repaid. How is this sustainable?” said an executive of a ratings company, who is closely following the situation at Country Garden. It will be almost impossible for the developer to deal with its short-term debt pressures by itself. Even financial help from shareholders may not be enough, the executive said.
Cash squeeze
Like many property developers that boomed before regulators imposed curbs on their financing, Country Garden thrived on borrowed money. For more than a decade until 2019, it was able to easily raise funds each year to repay maturing debt and finance its operations.
But the crackdown on financing aimed at curbing risks at overleveraged developers put an end to that funding model, and Country Garden’s cash flow from financing activities turned negative in 2020, leaving it reliant on sales proceeds to fund operations.
The downturn in the property market that started in 2021 when the country was in the grip of the Covid pandemic meant cash flow from new-home sales also started to deteriorate. The drop in sales has been especially bad for Country Garden, which bet heavily on housing demand in third- and fourth-tier cities, where the market crash was more severe than in first- and second-tier cities.
The company had held the No 1 position on China Real Estate Information Corp’s list of the top 100 property developers by sales value for a number of years, but in a sign of its waning fortunes, it fell to sixth place in the first half of 2023.
The housing slump has been worse in third- and fourth-tier cities where overbuilding was rampant and oversupply is now the most severe, which means Country Garden will find it more difficult to boost sales. That’s fuelled concerns the company will eventually default on its bonds.
The developer and two of its major subsidiaries will need to repay more than 18.5 billion yuan in maturing onshore bonds by the end of the year, including 7.3 billion yuan maturing in September. No offshore bonds are maturing this year, information compiled by Bloomberg showed.
At the end of 2022, the property giant had 1.7 trillion yuan in total assets and 1.4 trillion yuan in total liabilities, including 271.3 billion yuan of interest-bearing debt, its annual report shows. On top of that, off-balance-sheet debt may be as high as 200 billion yuan, according to a source with ties to the developer. The impact, should Country Garden start defaulting, could be as severe as that of China Evergrande Group, the source said.
Evergrande, the world’s most indebted property developer, disclosed in July that its total liabilities amounted to 2.4 trillion yuan as at December 2022, including borrowings of 612.4 billion yuan. It is currently trying to restructure its debts, including some US$19 billion of offshore bonds.
As the property crisis deepened last year, the government rolled out several measures to help qualified developers raise money to ease their liquidity crunch, including selling shares through private placements and government-backed credit guarantees on bond sales.
Country Garden has been trying to expand its financing channels, a source with knowledge of the matter told Caixin. Media reports said it was planning to raise HK$2.34 billion through a share placement, although the company denied the speculation earlier this month. It has indeed been considering a share placement, but the timing is not right and it’s waiting for a better opportunity, the source said.
Meanwhile, as one of the few large private developers that hasn’t defaulted on its bonds, Country Garden is still able to borrow from banks and issue new bonds. But it won’t be able to raise enough to fill the hole left by the drop in home-sale proceeds, a finance industry source said.
Country Garden set up three task forces to boost sales, sources told Caixin. It has also cut back on land purchases and laid off workers to save costs. It’s even scrimping on launch ceremonies for new projects, one source said.
Ultimately, the developer will have to either try to extend the maturity of its debt or secure guarantees from local governments so that it can issue more bonds. But with sales still sluggish, even bond issuances backed by guarantees may not solve its financial problems, a Guangdong-based financial institution source said.
“Country Garden has done all a company can do, but things are not looking good,” said a banking source, who noted that its troubles are a microcosm of what’s happening across the real estate industry.
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