Country Garden Confronts Offshore Debt Challenge: Potential for One of China's Most Significant Restructurings

10 Oct, 2023

Country Garden Confronts Offshore Debt Challenge: Potential for One of China's Most Significant Restructurings

Chinese real estate giant Country Garden has issued a warning regarding its inability to fulfill offshore debt obligations, sparking concerns about one of China's most significant debt restructurings. While the company has not yet defaulted, it has missed coupon payments on certain dollar bonds since the previous month, and it faces looming deadlines for payments.

According to a Reuters report, Country Garden, the largest private property developer in China, has expressed its struggles with "significant challenges" in sales and financing, leading to a continuous decline in available funds. The company has acknowledged that meeting all of its offshore payment obligations on time or within grace periods is unrealistic, potentially triggering creditor demands for payment acceleration or enforcement actions.

This alert from Country Garden underscores the severity of the liquidity crisis in China's property sector, a vital component of the nation's economy. It also highlights the contrasting fortunes of property developers and households in the face of stricter monetary policies. Since the liquidity crisis hit the sector in 2021, nearly 40 percent of Chinese home sales have been linked to private property developers who have defaulted on debt obligations, leaving numerous housing projects incomplete.

To address the ongoing challenges in the property sector, Beijing has implemented various measures aimed at boosting confidence among homebuyers. Nevertheless, the mounting debt issues faced by developers are likely to continue casting a shadow on the sector's recovery.

Country Garden, holding $10.96 billion in offshore bonds and 42.7 billion yuan ($5.86 billion) in offshore loans, is grappling with uncertainty concerning asset disposals and a cash shortage. In response, the company has enlisted the services of financial advisers Houlihan Lokey, China International Capital Corporation (CICC), and law firm Sidley Austin to assess its capital structure and liquidity position and formulate a comprehensive solution.

"We do not expect Country Garden's liquidity to materially improve as homebuyers and financial institutions may continue to stay on the sidelines," said Morningstar analyst Jeff Zhang, as quoted by Reuters. The next two weeks will be crucial for the company as the outcome of overseas debt restructuring hangs in the balance.

Country Garden had been slated to make a $66.8 million coupon payment on its 2024 and 2026 dollar bonds, which included a 30-day grace period. Whether these payments were made remains unclear. Additionally, the company failed to make a principal payment of HK$470 million ($60.04 million) on specific debts.

The upcoming week poses a significant test for the company, as its entire offshore debt could be classified as in default if it fails to make a $15 million September coupon payment by October 17, the end of the 30-day grace period.

Despite these challenges, the company has received approval from onshore bondholders for the extension of nine series of bonds with an outstanding principal value of 14.7 billion yuan ($2.02 billion). This extension provides valuable time for the company to focus on recovering its business operations.

Country Garden's shares have come under significant pressure, losing over 10 percent on Tuesday, marking a decline of nearly 70 percent in value since the beginning of the year. The company appears to be adapting its business model, aiming to reduce its debt burden, rightsize its business, and accelerate asset sales.