Country Garden: How bad are the Chinese property developer’s debt problems? By Reuters

By Xie Yu

HONG KONG (Reuters) -China is grappling with a slowdown that has rattled global markets, with the spotlight now focused on troubled developer Country Garden’s debt crisis in the property sector, which accounts for roughly a quarter of the economy.

On Thursday, Country Garden delayed a deadline for creditors to vote on whether to postpone payments for an onshore 3.9 billion yuan ($537 million) private bond until Friday 1400 GMT, saying it wanted to give bondholders sufficient time to prepare for the vote.

The vote is a key hurdle as Country Garden strives to avoid default, with one holder of its dollar bonds saying if the company cannot extend its domestic debt, it will be unable to service external bondholders.

Who is Country Garden and why do people care about its debt woes?

Until this year Country Garden was the largest Chinese developer by sales. The company was considered financially sound compared with peers like China Evergrande (HK:) Group which defaulted on its debt in 2021.

While Country Garden’s liabilities are only 59% of those at Evergrande, it has 3,103 projects across China, compared with around 800 for Evergrande – making the company matter to systemic stability while also fueling contagion fears as it shows signs of financial stress.

A default by Country Garden would exacerbate the country’s spiraling real estate crisis, put more strain on its onshore lenders, and could delay the prospect of a recovery of not only the property market, but the overall Chinese economy.

How bad is Country Garden’s financial situation?

Country Garden’s total liabilities were about $194 billion by the end of June, unchanged from the end of 2022, based on its first-half financial results.

It faces 108.7 billion yuan ($14.9 billion) worth of debts due within 12 months, while its cash levels are around 101.1 billion yuan.

The company’s liquidity stresses became public early last month after it missed two dollar coupon payments. It also has been talking with its onshore creditors to extend a 3.9 billion yuan private bond due Saturday.

Country Garden also has dollar coupon payments on its other offshore bonds coming due each month for the rest of 2023. And it has onshore bond payments totaling 12.6 billion yuan by the end of the year, according to CreditSights.

Will Beijing bail out Country Garden and what is the outlook for the developer?

Beijing has so far not directly bailed out any private Chinese developer despite some of them coming to the brink of collapse since the property crisis hit the economy in 2021, after a regulatory crackdown on developers’ accumulation of debts.

In the case of Evergrande, however, the provincial government of the southern province of Guangdong, where the developer is based, did step in to help manage the fallout from its destabilising financial crisis in late 2021.

For now, the Chinese authorities are scrambling to introduce a string of measures, including mortgage rate cuts and an easing of home purchase restrictions, to revive the property market and prop up the sputtering economy.

However, the outlook for Country Garden is worsening.

Moody’s (NYSE:) slashed its credit ratings for the company by three notches to Ca from Caa1 on Thursday due to worries it could be on the brink of default. It said Country Garden was facing tight liquidity and recovery prospects for bondholders could be weak.

Country Garden itself also warned on Wednesday of default risks if its financial performance continues to deteriorate, and said it “felt deeply remorseful” for its record loss in the first half.