Country Garden leaves investors in dark on exact default deadline

HONG KONG - The distressed Chinese developer that rattled markets by

missing interest payments on dollar bonds earlier this month

is leaving investors in the dark about the exact date a key grace period ends, the latest sign of opaqueness in a market that has lost US$87 billion (S$118 billion) in the past two years.

Country Garden Holdings, among China’s biggest, must repay a combined US$22.5 million in two coupons within that period, otherwise creditors could call a default that would be the developer’s first on such debt. That would threaten even worse impact than defaulted peer China Evergrande Group, given Country Garden has four times as many projects.

But there is uncertainty whether the grace period ends on Sept 5 or 6, raising the risk of legal wrangling if payment straddles those dates. The ambiguity stems from differing interpretations of standard wording in the offering memorandum. The document defines an “event of default” as delinquency “in payment of interest which continues for 30 days”.

That is clear enough. But what makes things uncertain is that the due date of Aug 6 was a Sunday, which meant the effective due date was the next business day, Aug 7. Should one count the 30-day grace period from Aug 6 or Aug 7? The document does not specify. Country Garden declined to comment.

China’s worsening property debt crisis has prompted a slew of developers, including Evergrande, to use grace periods in recent years. In many cases, doing so has only bought time before they eventually went on to default, adding to record debt failures.

Growing concerns that the same fate could strike Country Garden, which had 1.4 trillion yuan (S$264 billion) of total liabilities at the end of last year, have dragged Chinese junk dollar bonds deeper into distress under 65 US cents. The market value of Bloomberg’s index for the securities, mostly issued by builders, has shrunk to only about US$44.7 billion from some US$131.8 billion two years ago.

Lack of clarification from Country Garden or involved parties on the builder’s missed interest payments and more generally on its debt plans makes “it hard to gauge recovery and derive fair value”, said Ms Zerlina Zeng, senior credit analyst at CreditSights. “This probably also contributes to the poor trading liquidity of these high-yield, distressed China property bonds.”

Several analysts at major global banks have recently mentioned in notes either Sept 5 or 6 as the deadline for the end of the grace period, underscoring the lack of consensus.

“We believe we should use the scheduled payment date as day zero, but we are not certain given it was Sunday,” Moody’s Investors Service said when asked about the matter. The rating firm downgraded Country Garden deeper into junk territory at Caa1 earlier in August.

The trustee for the bond, Citicorp International, also declined to comment.

Of course, if the developer winds up not paying the interest, the confusion over the grace period expiry will cede to broader concerns. Creditors would then focus on how much they may eventually claw back through any potential restructuring, should the firm follow other builders down that path.

Country Garden,

helmed by one of China’s richest women, Ms Yang Huiyan,

has made no public comments directly concerning its missed dollar note interest payments or whether it plans to repay within the grace period. The builder apologised more generally earlier this month, vowing to take more powerful and effective measures to ensure home delivery and address periodic liquidity stress.

The coupon payments in question are: US$10.5 million of interest on a dollar bond that matures in 2026, and US$12 million on a note due 2030. BLOOMBERG