China’s Country Garden default on dollar bond declared for first time, ET RealEstate

October 25, 2023

BEIJING: Chinese developer Country Garden Holdings Co was deemed to be in default on a dollar bond for the first time ever, underscoring its fall into distress amid a broader property debt crisis that’s shaken the world’s second-biggest economy.

Country Garden’s failure to pay interest on the note within a grace period that ended last week “constitutes an event of default,” according to a notice to holders from trustee Citicorp International Ltd seen by Bloomberg News. That means that the trustee must declare principal and interest due immediately if holders of at least 25% in aggregate principal amount of the notes outstanding demand it. There is no indication that creditors have made any such demand yet.

The builder, among the world’s most indebted developers, didn’t pay $15.4 million of dollar bond interest by the end of a 30-day grace period after missing the initial deadline of September 17. A default had appeared all but official after Country Garden told Bloomberg News last week that it didn’t expect to be able to meet all offshore payment obligations on time. The company is now likely headed for what would be one of the nation’s biggest-ever restructurings.

A spokesperson for Citigroup declined to comment about the trustee notice to Country Garden bondholders. Country Garden didn’t immediately offer a comment when reached Wednesday.

Helmed by one of China’s richest women, Yang Huiyan, the builder’s sheer size has made it important to the nation’s economy, where the property market along with related industries accounts for about 20% of gross domestic product. The default comes just as Chinese President Xi Jinping steps up support for the economy, issuing additional sovereign debt, raising the budget deficit ratio and even making an unprecedented visit to the central bank.

The company was the country’s largest builder by contracted sales for several years before plunging to seventh so far in 2023. Despite that decline, it still recently had more than 3,000 housing projects in smaller cities and about 70,000 employees. For that reason, turmoil could lead to a worse impact than from the debt failure in 2021 at distressed peer China Evergrande Group given it has several times the number of projects.

Chinese authorities have been seeking to revive the real estate market after developers suffered record defaults as a builder debt crisis heads into its fourth year. The problems for the property market began in 2020 when authorities laid out “three red lines.” Those rules set leverage benchmarks builders had to meet if they wanted to borrow more money.

Authorities have taken several steps in recent months as they try to fine tune policy, including a broad relaxation of downpayment requirements and cuts to some mortgage rates. But that hasn’t been enough to turn things around: Property investment contracted 9.1% in the first nine months of the year, data last week showed.

Some prospective homebuyers have held back on purchases due to fears that builders might not be able to complete residences. Underscoring the depth of the problems, Country Garden recently said that its September contracted sales tumbled 81% from a year earlier.

In what’s often a prelude to a broader restructuring, the company recently hired advisers to review its capital structure. Its dollar notes have been indicated around 5 cents, showing how little money investors expect to recover, after some were near 80 cents in June. Its shares have dropped about 74% this year.

The firm has yet to officially default on any onshore bonds. It won noteholder approval in September to extend payments on nine onshore securities with a combined 14.7 billion yuan of principal.

  • Published On Oct 25, 2023 at 03:00 PM IST

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