Country Garden restructuring fears deepen China property concerns

The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China Aug 9, 2023. REUTERS/Aly Song/File photo

HONG KONG  -Country Garden’s shares hit a record low on Friday on fears that the Chinese property company is preparing for a debt restructuring, adding to concerns about the property sector outlook in the absence of stronger support from Beijing.

The country’s top private property developer, which had total liabilities of about $194 billion at the end of 2022, is expected to kick off a restructuring process soon, Chinese news outlet Yicai said, citing an unnamed financial source.

Country Garden would be the latest to join a growing list of developers to kick-start a debt restructuring process – others including China Evergrande Group and Sunac China Holdings have already proposed such terms.

The sell-off in Country Garden’s bonds and shares also came after the developer warned on Thursday it could report a loss of up to $7.6 billion for the first half and apologized to investors for misjudging market conditions.

Once considered one of the more financially sound developers, Country Garden’s woes could have a chilling effect on homebuyers and financial institutions, further squeezing a sector that has already seen plunging sales, tight liquidity and a series of developer defaults since late 2021.

China’s politburo, a top decision-making body of the ruling Communist Party, pledged in July to adjust property policies in a timely manner, fueling speculation stimulus was on the way for a sector that accounts for a quarter of its economy.

But no major moves have been made by the top regulators to date.

China’s securities regulator held a meeting on Friday with some developers and discussed their sales and debt situation, financial news website Cailianshe reported, citing people familiar with the matter.

The regulator also asked the property developers about their financing needs and sought suggestions, according to Cailianshe.

Analysts say Country Garden’s $22 million of missed coupon payments this week could help prod regulators into rolling out stronger aid measures, but they had little faith such steps would turn the sector around any time soon.

Country Garden has a 30-day grace period for missed payments. It also has other near-term repayment obligations. In September alone, the developer may need to repay more than 9 billion yuan ($1.25 billion) worth of onshore bonds.

The company does not have enough cash to meet the payments due so it might ask creditors for an extension to ensure liquidity for home construction, media outlet Caixin reported on Thursday evening, citing unnamed people close to the company.

China International Capital Corporation (CICC) has been hired as a financial adviser to Country Garden, the Yicai and Caixin reports said.

Country Garden declined to comment. CICC did not respond to a request for comment.

Country Garden shares ended down 5.8 percent on Friday, having fallen as much as 14.4 percent during the day to a record low of HK$0.89. Most of its dollar bonds traded at a record low below 7 cents on the dollar.

Moody’s, which downgraded Country Garden’s corporate family rating by three notches to Caa1 from B1 on Thursday, said on Friday the company’s credit distress is likely to spill over to the country’s property and financial markets.

“It is likely to further weaken market sentiment and delay the recovery of China’s property sector,” it said.

Debt restructuring

On Thursday, Country Garden forecast a net loss of up to 55 billion yuan ($7.6 billion) for the first half compared with a 1.9 billion yuan net profit a year ago, citing a drop in gross margin and an increase in inventory impairments.

“We think the profit warning is not a surprise to the market …however, the read-across from the inventory impairment and the recent property price decline is negative to other developers, including state-owned developers,” UBS analyst John Lam said in a research note.

In a filing, Country Garden apologized for its inability to properly forecast the depth and intensity of China’s property downturn or to take earlier countermeasures.

“The understanding of potential risks such as excessive investment proportion in third-and fourth-tier and even lower-tier cities …were insufficient,” it added.

The company on Friday posted a letter of apology in its social media, saying it felt guilty for not having done well enough. It said it would put full effort into home completion, resolving liquidity pressure and ensuring operations.

Among other restructurings in the sector, smaller peer China Aoyuan Group said on Thursday holders of 75.9 percent of its offshore note principals supported its restructuring terms, passing the 75 percent threshold required.

Fantasia Holdings, the first developer to announce a debt restructuring during the current crisis, resumed trading on Friday after a 16-month halt, with its shares dropping 60 percent after it released long-overdue financial results.

($1 = 7.8168 Hong Kong dollars)

($1 = 7.2289 Chinese yuan renminbi)

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