China’s Country Garden Misses Bond Payments Amid Cash Crunch

Country Garden Holdings has missed interest payments on a pair of offshore bonds, pushing China’s largest developer by sales closer to formal default and raising the spectre of a fresh round of failures in the mainland’s property industry.

The Foshan-based builder failed to pay $22.5 million due on a pair of bonds, the company said on Tuesday, with those instruments worth a combined $1 billion when issued. Investors reacted by driving Country Garden’s stock down more than 22 percent this week on the HKEX to HK$1.11 per share at the close of trading on Wednesday.

Until the last few months, privately controlled Country Garden had continued to show relative financial stability even after rival China Evergrande, which had ranked as the mainland’s largest developer by sales in 2020, had suffered its first defaults in the second half of 2021.

However, Country Garden has been facing a rapid decline in its home sales this year as China’s homebuyers continue to lose faith in both the housing market and the stability of the nation’s builders. The company’s cash shortage became acute following a failed HK$2.34 billion ($300 million) equity sale last week.

Financial Crunch

There is a 30-day grace period on Country Garden’s missed bond obligations, giving the company time to arrange payment. However, the developer has $397 million in offshore bonds maturing this year, plus $1 billion in USD notes due on 27 January.

Also challenging Country Garden’s liquidity is a rapid slide in home sales. During the first seven months of this year the company achieved contracted sales of HK$140.8 billion, which was down nearly 35 percent from the same period in 2022. The company has also seen average prices for its contracted sales decline by 2.31 percent from January through July, compared to the first seven months of 2022, based on its unaudited operating statistics.

With liquidity tight, Country Garden may be caught between directing its limited cash to repaying investors or funding the ongoing construction of its development projects.

While Chinese authorities have recently moved to provide financial support to developers, the government has made handover of finished homes to consumers a top priority as it seeks to rebuild public confidence in the real estate market.

In a press conference late last week officials from the National Development and Reform Council (NDRC), the country’s top planning body, said the bureau would “Continue to implement phased policies such as supporting the work of guaranteed delivery of buildings,” with China’s Central Bank promising financial support to developers in the same session.

Losses Hurt

Country Garden’s missed bond payments come after the company warned in a statement to the Hong Kong stock exchange on 31 July that, after achieving a net profit of RMB 1.9 billion in the first six months of 2022, it expects to suffer a loss for that same period this year.

The company attributed the expected first half loss to declining profit margins for its real estate business, and increased impairment provisions for its development projects as home sales in China continue to decline.

After the profit warning and the failed equity sale, Moody’s Investors Services downgraded Country Garden’s corporate family rating and rating for its senior secured notes to B1 from Ba3, while noting that the outlook for the firm’s rating remains negative.

“The downgrade reflects our expectation that Country Garden’s credit metrics and liquidity buffer will weaken due to its declining contracted sales, still-constrained funding access and sizable maturing debt over the next 12-18 months,” Moody’s senior vice president Kaven Tsang said in the announcement on 3 August.

Moody’s said that with Country Garden’s projects concentrated on China’s lower-tier cities, where there is weaker demand, that it expects the developer’s contracted sales to underperform the market. For the full year 2023 the ratings agency predicts contracted sales of RMB 210 billion for Country Garden, and RMB 180 billion in 2024 – down from RMB 357 billion in 2022.

Through the end of 2024 Moody’s estimates that Country Garden will have around RMB 17 billion of onshore bonds and RMB 14 billion of offshore bonds due or becoming puttable.