Country Garden restructuring fears deepen concerns about China property sector

By Clare Jim

HONG KONG (Reuters) -Fears that Chinese property giant Country Garden (HK:) was preparing for a debt restructuring sent its securities to a record low on Friday and deepened 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 and large exposure to lower-tier cities, is expected to kick off a restructuring process soon, Chinese news outlet Yicai said, citing an unnamed financial source.

Country Garden on Thursday warned it could report a loss of up to $7.6 billion for the first half and apologised to investors for misjudging market conditions.

Once considered as 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 late July to adjust property policies in a timely manner, fuelling speculation stimulus was on the way for a sector that accounts for a quarter of its economy. However, no major moves have been made by the top regulators to date.

Industry executives and analysts said Country Garden’s $22 million of missed dollar coupon payments this week could help prod regulators into rolling out stronger aid measures, but they had little faith such steps would turn the debt-laden sector around any time soon.

The company has a 30-day grace period for this week’s missed payments, but the news triggered a sell-off in its shares and bonds.

In September alone, Country Garden could face more than 9 billion yuan ($1.25 billion) of total onshore bond payment obligations. 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, the Yicai and Caixin reports added.

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

Country Garden shed as much as 14.4% on Friday morning to a record low of HK$0.89 ($0.1139), having lost 38% of their value so far this week.

Most of its dollar bonds traded at a record low below 7 cents on the dollar, further down from 8 cents on Tuesday after it missed the two coupon payments.

The firm’s onshore notes including two bonds due in 2025 trading in Shanghai dropped more than 11%.

RISING IMPAIRMENTS

Country Garden on Thursday 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 apologised for its inability to properly forecast the depth and intensity of the 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.

Ratings agency Moody’s (NYSE:) on Thursday downgraded Country Garden’s corporate family rating to Caa1 from B1, citing heightened liquidity and refinancing risk after the company missed bond payments.

Other major Chinese property developers including China Evergrande Group (HK:) and Sunac China Holdings (HK:) have already proposed offshore debt restructuring terms.

Smaller peer China Aoyuan Group (HK:) said on Thursday holders of 75.9% of its offshore note principals supported its restructuring terms, passing the 75% threshold required.

Fantasia Holdings (HK:), 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% after it released long-overdue financial results.

Zhenro Properties (HK:), which had also defaulted on debt, said on Thursday it expected a net loss of up to 1.6 billion yuan in the first half, narrowing from a 2.6 billion yuan loss a year ago.

($1=7.8168 Hong Kong dollars)

($1=7.2289 renminbi)

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