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Country Garden says it can’t make all its external debt payments, paving the way for renewal

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  • The company says it faces significant uncertainty regarding the disposition of assets
  • The next external debt test is the $15 million coupon payment on October 17
  • Municipal bondholders agree to restructure $2 billion in debt

HONG KONG (Reuters) – Country Garden (2007.HK) warned on Tuesday of its inability to meet foreign debt obligations, which could join a growing list of Chinese developers that have defaulted and pave the way for one of the country’s largest debts. Restructuring.

Companies accounting for 40% of Chinese home sales – mostly private property developers – have defaulted on debt obligations since a liquidity crunch hit the sector in 2021, leaving many homes unfinished.

Country Garden, China’s largest private property developer, has not defaulted so far, but has defaulted on coupons on some dollar bonds since last month and faces the end of 30-day grace periods to make payments starting next week.

In a filing with the Hong Kong Stock Exchange on Tuesday, Country Garden said its sales and financing were facing “significant challenges” and that its available funds continued to decline.

The company said it “will not be able to meet all external payment obligations as they fall due or during the relevant grace periods,” adding that non-payment could result in creditors being required to accelerate payment or pursue enforcement actions.

Country Garden’s warning highlights how unprecedented liquidity pressure in China’s real estate sector, which accounts for nearly a quarter of the economy, and weak sales continue to darken the outlook for developers.

Beijing has rolled out a raft of measures in recent months, including lowering deposit requirements and lowering current mortgage interest rates, to help renew homebuyers’ confidence, but developers’ growing debt woes are unlikely to help achieve that goal.

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Country Garden, which has $10.96 billion in offshore bonds and 42.7 billion yuan ($5.86 billion) in offshore loans, said it faces “substantial” uncertainty regarding asset dispositions and that its cash position remains under pressure.

The developer said it has appointed Houlihan Lokey, China International Capital Corporation (CICC) and law firm Sidley Austin as consultants to examine the capital structure and liquidity position and formulate a comprehensive solution.

The company added that it will work with advisors to develop the most realistic and optimal solution for all stakeholders, and called on creditors to be patient.

The advisors’ assignment showed “whether the company will default depends on the outcome of the external debt restructuring, and the next two weeks will be crucial,” said Morningstar analyst Jeff Chang.

“We do not expect Country Garden’s liquidity to improve materially as homebuyers and financial institutions may continue to remain on the sidelines.”

A big test looms

China’s latest property sector downturn began in 2021 after a government-led crackdown on a debt-fueled construction boom. It has deepened as economic growth has faltered and confidence in the housing and capital markets has dried up, which has led to further pressure on developers’ liquidity.

Country Garden was scheduled Monday to pay $66.8 million in coupons on 2024 and 2026 dollar bonds, though the payments have a 30-day grace period. The developer did not reveal whether these payments had been made or not.

The company said in a filing on Tuesday that it had not made a key payment of HK$470 million ($60.04 million) on some debts, without providing further details.

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Country Garden faces a big test next week when all of its foreign debt could be deemed in default if it fails to pay a $15 million September coupon by October 17, at the end of a 30-day grace period.

However, it has received approval from local bondholders to roll over nine series of bonds with an outstanding principal amount of 14.7 billion yuan ($2.02 billion), the filing said.

She added that the extension gave it “time and space to focus on restoring its business operations.”

Liquidation petitions

Country Garden shares extended losses on Tuesday, falling more than 10% by afternoon, having lost nearly 70% of their value since the start of the year.

“The company’s previous model was not sustainable, and they are addressing it now, trying to reduce their debt load and scale their business appropriately,” said Sandra Chow, co-head of Asia Pacific research at CreditSight.

“There is a smaller real estate market overall and it makes sense to adapt to that,” she said, adding that the restructuring would target extending debt repayment terms, lowering bond coupon rates and accelerating asset sales.

Country Garden said it would make “every effort to ensure the delivery of properties, which is the most important responsibility of the group and the cornerstone of protecting the real estate market.”

Several struggling developers, including China Evergrande Group (3333.HK), which is at the heart of the debt crisis, are facing liquidation petitions. So far, only two couples have been sentenced to liquidation by foreign courts.

Smaller peer Kaisa Group (1638.HK) said creditors would get less than 5% of their money if they had to liquidate, said a lawyer for one of the creditors, Broad Peak Investment, which filed a termination petition against the developer. Court in Hong Kong on Tuesday.

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($1 = 7.8284 Hong Kong dollars)

(Reporting by Scott Murdoch in Sydney and Shi Yu in Hong Kong; Preparing by Mohammed for the Arabic Bulletin) Additional reporting by Rishav Chatterjee in Bengaluru and Claire Jim in Hong Kong; Editing by Rashmi Aish, Lincoln Feast, Jamie Freed, and Kim Coghill

Our standards: Thomson Reuters Trust Principles.

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Scott Murdoch has been a journalist for more than two decades working for Thomson Reuters and News Corp in Australia. He has specialized in financial journalism for most of his career and covers capital and debt markets across Asia and Australian mergers and acquisitions. He lives in Sydney.

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