Default dodged, but Country Garden’s upcoming debt payments stir worries: Analysis

HONG KONG/NEW YORK: Creditors of Country Garden Holdings are doubtful the Chinese developer will be in a position to service debt that will come due later this year without liquidity support, after it averted a catastrophic default this week at the last minute.

With its financial situation precarious and prospects of China’s property sector remaining grim, the offshore creditors expect the country’s largest private developer to get liquidity support soon or for it to undergo a debt revamp.

Country Garden’s financial woes have become the latest to hit China’s property sector, which was once a pillar of growth for the world’s second-largest economy but has become its biggest drag since 2021 amid an unprecedented liquidity crisis.

The company paid US$22.5 million in dollar bond coupons on Tuesday (Sep 5) hours ahead of a grace period deadline, pulling back from the brink of default for the second time in four days and bringing relief to the property sector.

“Historically, external creditors have really not done well in restructurings coming out of China,” said Edward Al-Hussainy, senior currency and rates analyst and head of emerging market fixed income Research at Columbia Threadneedle, which holds some of Country Garden’s dollar bonds.

“The fact that they paid this coupon tells me that there’s some conversation happening at the company management level and very likely between company management and government at this stage, that liquidity, or some form of liquidity support, is becoming more likely.

“Otherwise, servicing this debt under today’s circumstances makes no sense.”

Country Garden, one of the few large Chinese developers that have not defaulted on debt obligations, has been facing liquidity pressure with reduced available funds as sales plunged, its interim financial statements show.

It posted a 48.9 billion yuan (US$6.68 billion) first-half loss, a record for the developer.

Its net gearing ratio, which measures financial leverage, rose to 50.1 per cent in the first half from 40 per cent at the end of 2022. It has around US$14.8 billion worth of debt due within 12 months, while its cash levels are around US$13.8 billion. The company’s total liabilities were around US$191 billion, unchanged from end-2022.

Country Garden has at least five coupon payments due this month, including two relatively sizable dollar bond coupons worth US$15 million due on Sep 17, and US$40 million on Sep 27, each with a 30-day grace period.

The developer may delay the upcoming coupon payments, use the grace period to come up with a restructuring plan, and try to convince investors to accept it, said a portfolio manager with a US asset manager, which owns some Country Garden bonds.

Given the company’s cash flow will remain tight as property sales recovery is expected to be sluggish, it would be a tough balancing act for the company in the absence of “meaningful” liquidity support, said the portfolio manager.

The portfolio manager declined to be named as they were not supposed to speak to the media.

Country Garden declined to comment.

DISTRESSED LEVELS

Investors are focusing on near-term sales prospects for Country Garden and its peers after the Chinese authorities rolled out a raft of support measures for the embattled property sector in the last few weeks.

Those measures included lowering existing mortgage rates and preferential loans for first-home purchases in big cities, but analysts say more was needed to stabilise the sector, restore consumer confidence and sow the seeds for an eventual recovery.

Despite those measures, China’s new home prices fell for the fourth month in August, according to a private survey on Friday, as the property debt crisis kept confidence at a low ebb.

“Country Garden will probably make full use of the grace periods … it still looks challenging for them to generate enough cash for the upcoming payments, both onshore and offshore,” said Ting Meng, a senior credit strategist at ANZ.

Benjamin Bennett, head of investment strategy and research at UK asset manager Legal & General Investment Management, said it would be a “huge surprise” if the developer kept on paying coupons.

“Hopefully they are using the time they’ve bought themselves in recent days to work out a proper restructuring plan so we don’t have the same extended uncertainty we had with earlier defaulters,” he said.