Country Garden’s Default Risks Grow as Coupon Payment Deadline Approaches
Concerns Mount as Country Garden Faces Potential Offshore Debt Default
China’s largest private property developer, Country Garden, faces the risk of defaulting on its entire offshore debt if it fails to make a $15 million coupon payment by Tuesday, marking the end of a 30-day grace period. The non-payment would trigger cross defaults in other bonds, following standard bond contract protocols.
Country Garden’s warning last week about its inability to meet offshore debt obligations has heightened worries as it joins the growing list of Chinese developers who have defaulted. Although the company has missed other offshore payments in recent weeks, these payments still have time within their 30-day grace periods.
Analysts see this situation as a stark reminder of the challenges faced by private-sector developers in China. Chris Beddor, Deputy Director of China Research at Gavekal Dragonomics, describes it as a high-profile and visceral illustration of the difficulties in the industry.
As the payment deadline approaches, one Country Garden bondholder revealed that no payment had been received as of noon on Tuesday. The company declined to comment on the matter.
Potential Consequences of Default
If Country Garden defaults on its offshore debt, it would set the stage for one of China’s largest corporate debt restructurings. The company currently holds nearly $11 billion of offshore bonds and $6 billion of offshore loans.
The current crisis in the Chinese real estate sector has made investors increasingly nervous. This was evident when another major property developer, Gemdale, experienced a significant drop in its stocks and bonds following the resignation of its chairman. Although Gemdale attributed the resignation to health reasons, analysts believe that broader sector concerns contributed to the market reaction.
Widespread defaults have plagued Chinese developers, with 40% of home sales contributors defaulting on their debt obligations since 2021, according to JPMorgan. In total, Chinese developers have defaulted on over $114.6 billion of the $175 billion in outstanding dollar bonds since 2021, according to CreditSights figures.
Debt Restructuring and Industry Outlook
With more developers seeking debt restructuring, offshore creditors may face less favorable terms due to the worsening outlook for China’s real estate sector. Country Garden has appointed Houlihan Lokey, China International Capital Corporation (CICC), and law firm Sidley Austin as advisers to assess its capital structure, liquidity position, and develop a comprehensive solution.
China has implemented numerous support measures to revive the property sector in recent months. However, analysts believe that these measures alone are unlikely to lead to a swift recovery. Industry data, including property sales by floor area and nationwide prices of new homes in September, will provide insight into the effectiveness of these measures.
As the deadline for Country Garden’s coupon payment looms, the company’s fate hangs in the balance, with potential repercussions reverberating throughout the Chinese property market.
