Country Garden faces offshore debt crisis: Potential for one of China's biggest restructurings

Chinese property giant Country Garden has sounded the alarm about its inability to meet offshore debt obligations, raising concerns about the possibility of one of China's most significant debt restructurings. While the company has not yet defaulted, it has missed coupon payments on certain dollar bonds since last month and faces looming deadlines for payments.

According to a Reuters report, the largest private property developer in China, issued a statement to the Hong Kong stock exchange, stating that it is grappling with "significant challenges" in sales and financing, leading to a continuous decrease in available funds. The company acknowledged that it would be unable to meet all of its offshore payment obligations on time or within grace periods, potentially triggering creditor demands for payment acceleration or enforcement actions.

The warning from Country Garden underlines the severity of the liquidity crisis in China's property sector, which accounts for a significant portion of the country's economy. It also highlights the contrasting fortunes of property developers and households in the face of tighter monetary policies. Since the liquidity crisis hit the sector in 2021, approximately 40 per cent of Chinese home sales have been tied to private property developers who have defaulted on debt obligations, leaving many housing projects incomplete.

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The ongoing challenges in the property sector have prompted Beijing to implement various measures to boost confidence among homebuyers. However, the mounting debt issues faced by developers are likely to continue casting a shadow on the sector's recovery.

Country Garden, with $10.96 billion in offshore bonds and 42.7 billion yuan ($5.86 billion) in offshore loans, is grappling with uncertainty regarding asset disposals and a cash squeeze. In response, the company has enlisted the services of financial advisers Houlihan Lokey, China International Capital Corporation (CICC), and law firm Sidley Austin to examine its capital structure and liquidity position and to devise a comprehensive solution.

"We do not expect Country Garden's liquidity to materially improve as homebuyers and financial institutions may continue to stay on the sidelines," Reuters quoted Morningstar analyst, Jeff Zhang. The next two weeks will be critical for the company as the outcome of overseas debt restructuring hangs in the balance.

Country Garden had been scheduled to make a $66.8 million coupon payment on its 2024 and 2026 dollar bonds, which includes a 30-day grace period. It remains unclear whether these payments were made. Additionally, the company failed to make a principal payment of HK$470 million ($60.04 million) on specific debts.

The coming week poses a significant test for the company, as its entire offshore debt could be classified as in default if it fails to make a $15 million September coupon payment by October 17, the end of the 30-day grace period.

Despite the challenges, the company received approval from onshore bondholders for the extension of nine series of bonds with an outstanding principal value of 14.7 billion yuan ($2.02 billion). This extension provides valuable time for the company to focus on recovering its business operations.

Country Garden's shares have been under significant pressure, losing over 10 per cent on Tuesday, marking a decline of nearly 70 per cent in value since the beginning of the year. The company appears to be adapting its business model, aiming to reduce its debt burden, rightsize its business, and accelerate asset sales.

(With inputs from Reuters)

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