Country Garden deadlines pose first big test of bond guarantees
ONE of China’s most indebted developers is facing two bond payment deadlines this week that could provide the first major test for a state-sponsored programme that guarantees debt from some of the country’s biggest builders.
Defaulted developer Country Garden Holdings has payments due on May 9 on two yuan bonds with combined interest of 66 million yuan (S$12.3 million).
Both notes are guaranteed by China Bond Insurance, a state-owned credit-support provider at the heart of a programme introduced by authorities in August 2022 to help private developers avoid liquidity crunches. None of the builders that have used the programme have missed payments on the guaranteed securities yet. Country Garden itself recently dodged its first local default on yuan bonds after missing payments on US dollar notes last year.
If Country Garden were to have trouble making the payments, the government would be on the hook and the prospect of further payouts down the line could suddenly be on the horizon.
“It is unclear whether Country Garden has the cash and willingness to pay the coupon given the sharp and continued contraction of its contracted sales,” said Zerlina Zeng, senior credit analyst at Creditsights. “However, we expect China Bond to step in if Country Garden misses the payment as failing to do would shake market confidence towards the bond guarantee programme.”
So far at least 33 bonds have been issued by private developers via the programme, with 33.7 billion yuan raised in total, according to Bloomberg-compiled data. Because payments on most of these bonds will not be due until 2025 or 2026, the programme has not faced a real test so far.
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Country Garden’s sheer size – with more than 3,000 housing projects in mainly smaller cities, according to its 2023 interim report – underscores its importance to the broader economy and the stakes for government if the guarantee programme has to be tapped.
Aside from Country Garden, private developers that have issued bonds via the programme include defaulted builder CIFI Holdings Group, as well as Longfor Group Holdings and Seazen Group, among others.
The programme is aimed at shoring up a sector that is still deeply mired in debt. During the boom years, many home buyers paid developers in advance for unfinished apartments. Now Chinese private developers face a four trillion yuan funding gap to complete pre-sold homes, according to a research report by Goldman Sachs Group.
Once China’s largest developer by sales, Country Garden has been hit hard by the property crisis and is now saddled with 1.4 trillion yuan of total liabilities, according to its unaudited 2023 interim results.
The Foshan-based company reported contracted sales for April of 3.9 billion yuan, compared with 22.7 billion yuan in the same period last year. BLOOMBERG
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