In a sign of its deepening financial distress amidst the broader property debt crisis that has reverberated through China’s vast economy, Chinese real estate juggernaut, Country Garden Holdings Co, has experienced its inaugural default on a dollar-denominated bond.
The default was declared as a result of Country Garden’s failure to meet its interest payment obligation on the bond within the grace period, which concluded last week. This non-payment has triggered an “event of default,” according to an announcement to bondholders issued by trustee Citicorp International Ltd, as reported by Bloomberg News. Consequently, the trustee is now compelled to demand the immediate repayment of principal and interest if bondholders representing at least 25% of the total outstanding principal amount of the bonds make such a request. To date, no such demand from bondholders has been reported.
This event marks a stark downfall for Country Garden, a firm known for its colossal debt load and its position among the world’s most heavily indebted real estate developers. The company failed to meet its obligation to pay $15.4 million in interest on the dollar-denominated bond within a 30-day grace period, after initially missing the payment deadline of September 17. The company acknowledged last week that it anticipated difficulties in satisfying all of its offshore payment commitments promptly. Consequently, Country Garden now appears headed towards what could become one of China’s most extensive corporate restructurings.
Despite a sharp drop in its ranking from the largest builder in China to seventh place in 2023, Country Garden retains its considerable influence due to its sheer magnitude and the extensive economic significance it holds within the nation. The property sector, along with its ancillary industries, represents roughly 20% of China’s Gross Domestic Product. The default transpires at a time when Chinese President Xi Jinping has intensified efforts to stimulate the country’s economy, including issuing additional sovereign debt, elevating the budget deficit ratio, and making an unprecedented visit to the central bank.
The company’s troubles started in 2020 when Chinese authorities introduced a set of “three red lines,” dictating specific leverage thresholds that property developers were required to meet in order to access additional financing. The challenges in the property market have persisted despite recent government interventions, including a widespread relaxation of down payment stipulations and reductions in certain mortgage rates. Recent data revealed a 9.1% contraction in property investment over the initial nine months of this year.
Apprehensions among potential homebuyers that developers might be incapable of delivering completed properties have caused a decline in housing purchases. Country Garden recently reported an 81% plummet in its contracted sales for September when compared to the previous year.
In a prelude to a more comprehensive financial restructuring, the company has initiated a review of its capital structure. The market reflects this grim situation, with the value of Country Garden’s dollar-denominated bonds hovering around a mere 5 cents, indicating minimal expectations of recovery from investors who once saw them trading near 80 cents in June. The company’s shares have seen a decline of approximately 74% this year.
Officially, Country Garden has yet to default on any onshore bonds. In September, it secured noteholder approval to extend payments on nine onshore bonds collectively amounting to 14.7 billion yuan in principal.
