Country Garden signals debt default, hires advisers as sales plunge

HONG KONG – Chinese developer Country Garden Holdings has ramped up warnings that it is set for its first-ever default and has hired advisers, the strongest indications yet that the company is headed for a restructuring that would be one of the nation’s biggest.

The builder “expects that it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, including but not limited to those under the United States dollar notes issued by the company”, it said in a filing on Tuesday.

“Such non-payment may lead to relevant creditors of the Group demanding acceleration of payment of the relevant indebtedness owed to them or pursuing enforcement action.”

Country Garden, which has become a symbol of China’s broader property debt crisis, said that

it had not made a due payment

in the amount of HK$470 million (S$82 million) on certain debts. The company missed initial deadlines in September to pay US$55.4 million (S$75.6 million) of interest on two dollar bonds, and grace periods are respectively set to end on Oct 17-18 and Oct 27. It has US$11 billion of offshore notes outstanding, according to data compiled by Bloomberg.

Tuesday’s filing “may pressure the offshore bondholders to approve any upcoming restructuring proposal”, said Australia & New Zealand Banking Group senior credit strategist Ting Meng. “The company is clearly still in a liquidity crunch with many unfinished projects to complete and limited access to new financing.”

Once China’s largest developer, Country Garden has been engulfed in a broader property debt crisis and

warned on Aug 30 that it may default.

Fresh concerns about financial market contagion from China’s property sector flared in August, when the firm failed to pay interest on two dollar bonds by an initial deadline. While Country Garden went on to meet those obligations within a grace period, it subsequently missed more initial deadlines and had not commented publicly on prospects for honouring those debts before Tuesday.

Helmed by one of China’s richest women, Ms Yang Huiyan, the builder is important to the nation’s economy due to its sheer size. Country Garden has more than 3,000 housing projects in smaller cities and about 70,000 employees. Hence, turmoil at the firm could lead to a worse impact than from 2021’s debt failure at distressed peer China Evergrande Group, given it has four times the number of projects.

In a sign that Country Garden’s debt woes are affecting prospective homebuyers’ confidence in the builder, the company said on Tuesday that September contracted sales plunged 81 per cent from a year earlier. Declines have been accelerating in recent months, with August’s 72 per cent drop following decreases in excess of 50 per cent in June and July.

Distress runs deep at Country Garden, one of the world’s most heavily indebted developers with 1.36 trillion yuan (S$259 billion) of total liabilities. Its dollar bonds are indicated in a range of five to seven US cents, indicating how little holders expect to recover in any eventual restructuring. The builder’s shares dropped as much as 8.3 per cent on Tuesday to their lowest since Aug 25.

ANZ’s Ms Meng said the firm’s base case is that the Country Garden dollar-bond coupons that were initially due in September will get paid during the grace periods. They entail US$40 million of interest on a 2024 bond that was due on Sept 27 and US$15.4 million that was effectively due on Sept 18 on a 2025 note, according to Bloomberg-compiled data.

There are questions about when the 30-day grace period ends on the 2025 bond before a default can be declared. That is because the interest date fell on a Sunday, and when that happens for bond issuers, the effective due date becomes the next business day. Similar uncertainty surrounded when exactly the grace periods ended for the coupons Country Garden did not pay on time in August.

As for bonds maturing in coming months, notably the US$1 billion 2024 note in January and a HK$3 billion bond this December, Ms Meng said Country Garden “will need to negotiate with bondholders for an offshore-debt restructuring plan”.

In addition to the two dollar-bond coupons in grace periods, Country Garden has six other such notes with interest due in the fourth quarter. Those six coupons are a combined US$116 million, Bloomberg-compiled data show.

Country Garden also said on Tuesday that it hired advisers, a step that distressed companies often take as they gear up to seek a broader debt restructuring.

It has engaged China International Capital Corporation Hong Kong Securities (CICC) and Houlihan Lokey (China) as joint financial advisers and Sidley Austin as legal adviser.

They will “evaluate the capital structure and liquidity of the Group and formulate a holistic solution”, the developer said. People familiar with the matter said late in September that Country Garden was in talks with Houlihan Lokey and CICC for both to become financial advisers and put together an offshore-debt restructuring plan.

Meanwhile, creditors of Country Garden have been in discussions with several financial advisers who are separately seeking to form an ad-hoc group ahead of a possible restructuring. PJT Partners and Moelis & Co have been talking with various creditors, people involved in the private conversations said earlier this week. No decisions have been made by creditors, the people added. 

BLOOMBERG