China’s Leading Developer Grapples with Debt Crisis and Advisory Appointments
Pierre-Olivier Gourinchas on Bond Sell-off and Fiscal Policy
Country Garden Holdings Co., a prominent Chinese developer, has escalated its warnings, hinting at an impending default, and has sought the services of financial advisers. These developments signify a growing likelihood of a significant restructuring, which could become one of China’s most substantial financial overhauls.
In a recent filing, Country Garden expressed its expectation of being unable to meet various offshore payment obligations within stipulated deadlines or grace periods, including payments associated with the U.S. dollar-denominated notes. The company’s non-payment could prompt creditors to demand accelerated repayment or initiate enforcement actions.
Ongoing Financial Challenges
Country Garden disclosed that it failed to make a due payment of HK$470 million ($60 million) on certain debts, with initial deadlines for $55.4 million in interest payments on two-dollar bonds having lapsed last month. The grace periods for these obligations are set to expire on October 17-18 and October 27, respectively. The company currently has $11 billion in outstanding offshore notes.
Impact on Bondholders
The recent filing may exert pressure on offshore bondholders to approve any forthcoming restructuring proposals. The company continues to grapple with a liquidity crunch, attributed to several unfinished projects and limited access to new financing, as noted by Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group.
Country Garden’s Economic Significance
Once recognized as China’s largest developer, Country Garden now finds itself embroiled in a broader property debt crisis. Its default warning on August 30 served as an initial alarm. Given its sheer size, with over 3,000 housing projects in smaller cities and approximately 70,000 employees, turmoil within Country Garden could potentially have more significant ramifications than the 2021 debt crisis experienced by distressed peer China Evergrande Group, owing to its fourfold increase in project numbers.
The company’s financial difficulties are negatively impacting homebuyer confidence. Country Garden reported an 81% decline in contracted sales for September compared to the previous year. This decline represents an acceleration of earlier months, with August witnessing a 72% drop and June and July experiencing declines exceeding 50%.
Country Garden stands as one of the world’s most heavily indebted developers, with total liabilities amounting to 1.36 trillion yuan ($187 billion). The indications for its dollar bonds fall within a range of 5 to 7 cents, illustrating bondholders’ low expectations of recovery in a potential restructuring. On Tuesday, the company’s shares plummeted by as much as 8.3%, reaching their lowest point since August 25.
Outlook on Bond Coupons
ANZ’s Meng believes that the Country Garden dollar-bond coupons initially due last month will be paid during the grace periods. These coupons include $40 million of interest on a 2024 bond due on September 27 and $15.4 million effectively due on September 18 for a 2025 note.
Uncertainty Surrounding Grace Periods
Questions arise regarding when the 30-day grace period expires for the 2025 bond before a default could be declared. This uncertainty stems from the interest date falling on a Sunday, with the effective due date shifting to the next business day, following standard bond issuer practices. A similar ambiguity surrounded the grace periods for the coupons that Country Garden did not pay on time in August.
Upcoming Bond Maturities
For bonds maturing in the coming months, such as the $1 billion 2024 note due in January and a HK$3 billion bond in December, Meng suggests that Country Garden will need to engage in negotiations with bondholders to formulate an offshore debt restructuring plan.
Country Garden has also announced the engagement of advisers, a common step for distressed companies preparing for comprehensive debt restructuring. China International Capital Corporation Hong Kong Securities Ltd. and Houlihan Lokey (China) Ltd. will serve as joint financial advisers, while Sidley Austin will provide legal counsel. These advisers will assess the company’s capital structure and liquidity, devising a comprehensive solution.
Meanwhile, creditors of Country Garden have initiated discussions with various financial advisers as they consider forming an ad-hoc group in anticipation of a potential restructuring. Notably, PJT Partners Inc. and Moelis & Co. have been in dialogue with creditors, though no final decisions have been made at this stage.