Country Garden Raises Doubts on Onshore Bond Payments as Offshore Default Looms

Chinese developer Country Garden appears headed for a full-scale restructuring after announcing Wednesday that “significant uncertainties” exist regarding the settlement of onshore bonds with an issued amount in excess of RMB 14.6 billion ($2 billion).

The lion’s share of the debt is from a Shanghai-listed RMB 5.83 billion bond with a remaining balance of more than RMB 3.9 billion that comes due on 2 September, Country Garden said in a filing with the Hong Kong stock exchange. The other bonds are a mix of Shanghai- and Shenzhen-listed notes maturing later this year and in 2025.

The onshore bonds were suspended from trading earlier this week, and plans are being laid to transfer the securities to an unnamed “professional institutional investor” at their full price, according to Country Garden.

The news is likely to heap further pressure on the Foshan-based homebuilder after it missed $22.5 million in interest payments on a pair of offshore bonds earlier this month. There is a 30-day grace period for those obligations, but the developer has $397 million in offshore bonds maturing this year, plus $1 billion in USD notes due on 27 January.

Extension Plan Sought

On Monday of this week, ThePaper.cn reported that Country Garden was negotiating an extension plan for the 2 September maturity, which is described as the first bond the developer has sought to extend since announcing that it was under financial pressure.

According to the mainland news site, the plan is to repay the interest on the debt when it matures and extend the principal for three years, paying 2 percent of the principal in the first, second and third months after maturity; 10 percent in the 12th month; 15 percent in the 24th month; 25 percent in the 30th month; and the remaining 44 percent in the 36th month.

A bondholder told ThePaper.cn that Country Garden has promised credit enhancement measures and pledged the equity of various project companies as security.

Hong Kong-listed shares of Country Garden were down more than 7 percent in Thursday trading. Bloomberg reported Thursday that Jefferies Financial Group had downgraded the shares to a hold, making it the last global brokerage to drop its buy rating for the stock.

Bracing for Losses

Country Garden’s missed offshore bond payments came after the company warned 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 the same period this year.

The builder chaired by Yang Huiyan — Asia’s one-time richest woman and the daughter of founder Yang Guoqiang — attributed the expected first-half loss to declining profit margins for its real estate business, as well as increased impairment provisions for its development projects as home sales in China continue to decline.

A Mingtiandi analysis of Country Garden’s operating statistics for the first seven months of this year shows that the developer’s sales declined 34.6 percent in value compared with the same period last year, with the slide accelerating to more than 53 percent in June and nearly 60 percent in July.

Moody’s Investors Service on 3 August 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 remained negative.

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