A person walks past a construction site of residential buildings by Chinese developer Country Garden in Beijing, China August 11, 2023. REUTERS/Tingshu Wang/File Photo LICENSING RIGHTS
HONG KONG/BEJING, Sept 2 (Reuters) – Country Garden has won approval from its creditors to extend payments on an onshore private bond, according to sources and a document seen by Reuters, bringing great relief to both the struggling Chinese developer and represents him in the crisis-ridden real estate industry.
Country Garden (2007.HK) had secured the approval of its creditors to extend the maturity of a 3.9 billion yuan ($540 million) onshore private bond in a vote that ended Friday night.
An unprecedented liquidity crunch in China’s huge real estate sector poses a major risk to a faltering recovery in the world’s second-largest economy from the COVID crisis that has rattled global markets.
Country Garden’s extension of debt payments buys China’s largest private property developer time to avoid a default and is good news for financial markets and the Chinese government, which has announced a raft of measures to support the property sector.
The extension means the developer can pay off the debt in installments over three years, rather than meeting its obligations by Saturday. The bond is not publicly traded.
In Friday’s vote, 56.08% of participating onshore bondholders of Country Garden approved the extension, 43.64% opposed and 0.28% abstained, according to an official document available to bondholders was asked.
Country Garden did not immediately respond to a request for comment. The sources, who have direct knowledge of the matter, asked not to be named as they were not authorized to speak to the media.
China’s real estate sector, which accounts for about a quarter of the economy, has been reeling from one crisis to another since 2021 after authorities cracked down on the debt-fuelled property developers’ construction boom.
As Country Garden’s financial troubles worsened over the past month, Beijing has rolled out a number of supportive measures, including cutting mortgage rates and lifting some home-buying restrictions.
Authorities will take further action, including easing restrictions on home buying, as Reuters reported on Friday, as they scramble to deal with the deepening crisis in their heavily indebted real estate sector.
Country Garden’s grace period could bring some relief to domestic bondholders, but there is still a long way to go as China seeks to de-risk the troubled real estate sector and boost the economy, analysts said.
“Sales in China’s biggest cities could improve significantly in the coming months as Beijing cuts mortgage rates and makes them more accessible to buyers,” said Zhou Hao, chief economist at Guotai Junan International.
“However, it remains to be seen how the improvement will affect developers’ cash flow. Also, different types of developers are likely to benefit very unevenly. Those with more projects in the prime cities could benefit first.”
According to analysts, the slump in China’s property market is due to more fundamental factors than the cost of borrowing, including broader debt concerns in the economy, cuts in employee pay and a demographic slowdown.
DEFAULT RISK
Up until this year, Country Garden was the largest Chinese developer by revenue. The company was considered financially sound compared to peers like China Evergrande Group (3333.HK), which defaulted on its debt in 2021.
While Country Garden’s liabilities account for just 59% of Evergrande’s liabilities, the company has 3,103 projects across China, compared to around 800 for Evergrande – making the company important for system stability.
A Country Garden default would have exacerbated the real estate crisis and weighed more heavily on onshore lenders.
The developer’s financial troubles became public last month after it missed two dollar coupon payments totaling $22.5 million, raising fears that the country’s deepening housing debt crisis would spill over into the broader financial sector.
Country Garden faces another major challenge next week when it falls due on last month’s missed coupon payments totaling $22.5 million on its two offshore dollar bonds.
Dollar coupon payments are also due each month for the remainder of 2023 on its developer’s other offshore bonds. He has onshore bond payments totaling 12.6 billion yuan by year-end, according to CreditSights.
Moody’s on Thursday cut Country Garden’s credit rating by three notches from Caa1 to Ca amid concerns the company may be on the brink of default. It said the company was facing tight liquidity and the recovery prospects for bondholders could be dim.
Country Garden on Wednesday warned of risks of default if its financial performance continued to deteriorate and said it felt “deep regret” for its record first-half loss.
Reporting by Xie Yu in Hong Kong, Kevin Huang and Li Gu in Shanghai; Edited by Sumeet Chatterjee and William Mallard
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