Country Garden Downplays Moody’s Downgrade, Announces $411M Bond Buyback

Country Garden Holdings Co says its downgrade to junk by a major credit agency won’t impact its debt-servicing ability and financing capability. In a separate announcement on Thursday the company announced progress on an early redemption of an offshore bond as China’s largest developer strives for an image of strength in a shaky industry.

Moody’s Investors Service lowered Country Garden one notch to Ba1 on Wednesday and gave a negative ratings outlook. The rating agency cited Country Garden’s “declining property sales and deteriorating financial metrics,” as well as “weakened access to long-term funding” as reasons for the downgrade.

The negative outlook reflects Country Garden’s “reducing liquidity buffer and financial flexibility,” said Kaven Tsang, Senior Vice President of Corporate Finance Group at  Moody’s Investors Service Hong Kong Ltd.

While the Guangzhou-based developer has thus far avoided the defaults and restructuring that have hit rivals like China Evergrande, Country Garden saw its contracted sales fall by 57 percent in April compared to a year earlier, with its May results down by 50 percent from 2021.

Country Garden Proclaims Health

Responding to the junk downgrade, China’s largest property developer by sales told China’s Securities Daily on Thursday that its sees the credit agency move as driven by a sector-wide slowdown, noting “slower-than-expected pace of improvement to the industry’s sales performance and financing environment”.

“The company is in stable operation and financial conditions. At the same time, as one of China’s first batch of private real estate enterprises entitled to issue corporate bonds with credit protection mechanisms, the company successfully issued a RMB 500 million corporate bond on May 20,” a Country Garden spokesperson told the official newspaper.

Separately, in a filing with the Hong Kong exchange filing Thursday, Country Garden said it is moving forward with a voluntary offer for an early buyback of a set of offshore bonds in a move that analysts see as flexing its financial muscles after the developer’s stock has fallen by more then 35 percent on the Hong Kong exchange in the last six months.

Investors holding 60.1 percent of the senior US dollar notes agreed to the early redemption which translates to Country Garden repurchasing $411 million of the principal. The company will also pay corresponding interest in the amount of US$19.7 per US$1,000 principal amount of the note. The note has a coupon rate of 4.75 percent and will come due on 25 July.

Country Garden paid investors cash for the notes on Friday and they will be cancelled accordingly, the developer said in a statement posted to its official WeChat account Thursday.

“The fact that the remaining investors chose to hold the notes to maturity demonstrates their confidence in the company’s debt repayment capability,” it said in the WeChat statement.

Joining the Crowd

Often referred to as a “model student” in China’s real estate sector, Country Garden is one of the country’s few large private sector developers that have not yet defaulted, avoiding the fate of rivals Evergrande, Sunac China and Guangzhou R&F.

The firm became China’s top developer by contracted sales in 2021, despite a lacklustre performance, after a second-half plunge knocked China Evergrande from the lead spot. From January through May this year, however, Country Garden’s contracted sales have declined by almost 40 percent to reach just RMB 150.6 billion amid challenging economic conditions and the impact of Covid curbs.

“Although the government has eased some restrictions in the property market, Country Garden’s high exposure to low-tier cities could expose it to sales volatility and profit margin pressure, given the weakened economic fundamentals there,” said Moody’s analysts said in their note.

Moody’s forecasts a 30 percent decline in Country Garden’s contracted sales this year. It also expects the developer’s gross margin to fall to 15 percent to 16 percent over the next 12 to 18 months from 18 percent in 2021, as declining property prices squeeze profits.

After repayment of the July senior notes, Country Garden will have only one offshore bond maturing through the end of 2023, Moody’s said. The agency considers Country Garden’s unrestricted cash of RMB 147 billion as of December 2021 and projected operating cash flow will be sufficient to cover its maturing debt that would become due or puttable by the end of 2023.

Still, Country Garden’s access to the offshore bond market will remain constrained given the weak market sentiment, Moody’s noted.

Country Garden now has been hit with junk-level ratings from two major credit agencies. S&P Global Ratings, which hasn’t deemed the developer investment grade since 2008, reaffirmed it at BB+, the top notch of the junk territory, in April and revised outlook to stable from positive.

Fitch Ratings moved Country Garden to investment-grade in 2017, but put the firm on watch for downgrade back to junk in June.

Moody’s raised Country Garden to investment-grade territory in September 2020, but lowered its ratings outlook to negative in March on expectations of falling profit margins and property sales into 2023 as well as weakened access to offshore funding. The firm was put on review for downgrade in May.