Country Garden issues default warning amidst steep drop in property sales

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Country Garden, one of China’s largest property developers, has issued a second warning in just over two months about the possibility of defaulting on its $190 billion debt. The company failed to make a repayment of $60 million to overseas bondholders and is facing a severe liquidity crisis. Despite avoiding multiple defaults in recent weeks, the company is struggling to raise enough funds to service its substantial debt due to ongoing weaknesses in the property market and challenging refinancing conditions.

Sales of Country Garden’s apartments plummeted by 81% in September compared to the same period last year. The company has expressed doubt about its ability to meet offshore payment obligations on time, which could prompt creditors to demand accelerated repayment or pursue legal action.

These developments highlight the ongoing downturn in China’s crucial property market, posing a significant threat to the country’s economic growth prospects. Analysts believe it could take years to recover from this crisis, with declining housing demand driven by an aging population. Additionally, concerns persist about Evergrande, another troubled property developer, which could experience an “uncontrollable collapse” due to difficulties in restructuring its massive debt. Such a scenario could negatively impact households and further erode confidence in the beleaguered real estate market, impeding Beijing’s efforts to revive the sector.

Country Garden has reported a historic loss of $7 billion for the first half of 2023 and has raised concerns about the possibility of default if its financial performance continues to deteriorate. As of June 2023, the company has approximately $15 billion in debt due by June 2024, with total liabilities amounting to around 1.36 trillion yuan ($190 billion). Defaulting on its debt could necessitate debt restructuring and potentially lead to creditors initiating winding-up proceedings against the company.

To address its offshore debt risk and restore business operations, Country Garden has enlisted the services of financial advisers, including China International Capital Corporation Hong Kong Securities and Houlihan Lokey (China), as well as legal advisers from Sidley Austin. This marks a significant shift for a company that, just two years ago, seemed relatively stable amid a broader crisis in China’s property sector.

However, the company’s recent struggles, characterized by declining sales and challenging refinancing conditions, have shaken investor confidence and triggered a sell-off in Chinese property stocks. This situation underscores the severity of the property market’s downturn and the difficulties faced by Beijing in managing the crisis.

Country Garden reported a sharp decline in sales, with September sales dropping by 81% compared to the previous year, following significant drops in August (72%) and July (60%). The company faces considerable uncertainty regarding asset disposals and anticipates ongoing liquidity challenges.

The company intends to cooperate and engage in discussions with its creditors to find a feasible solution promptly. This potential debt restructuring would be the latest among Chinese home builders, reflecting the ongoing challenges in the industry.

Notably, Evergrande, once China’s second-largest and the world’s most indebted developer, defaulted in late 2021. The Chinese government intervened to prevent a chaotic collapse and established a risk management committee to guide its restructuring. However, Evergrande’s plans were disrupted when its founder and chairman, Xu Jiayin, was detained by Chinese authorities on suspicion of crimes in 2023, casting doubt on the company’s future.

Sunac China, the third-largest Chinese homebuilder in 2021, also proposed restructuring its liabilities after facing payment difficulties. In March, it unveiled a $9 billion restructuring plan and recently obtained approval from a Hong Kong court, potentially setting a precedent for other major Chinese developers facing similar challenges.

(Source: Laura He | CNN | Daisuke Wakabayashi | New York Times)

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