Explainer: Country Garden: What happens next?

Houlihan Lokey

17/10/2023 08:33

By Clare Jim
       HONG KONG, Oct 17 (Reuters) - Country Garden's  2007.HK 
entire offshore debt will be deemed to be in default if China's
largest private property developer fails to make a $15 million
coupon payment on Tuesday, the end of a 30-day grace period.
        
  
    WHAT IS EXPECTED TO HAPPEN NEXT?
    A non-payment is expected after Country Garden last week
warned about its inability to meet offshore debt obligations. 
Its dollar bonds are being bid at below 6 cents on the dollar.
        Country Garden has appointed Houlihan Lokey, China
International Capital Corporation (CICC) and law firm Sidley
Austin as advisers to carry out an offshore debt restructuring.
    As is common practice, they should start negotiations with
bondholders on the restructuring proposals. It could take many
months before an agreement is reached. 
    Bondholders are also in talks with other financial
institutions and law firms to form a group to consider their
options.
    As more Chinese developers move towards restructuring debt,
their offshore creditors are expected to be offered less
favourable terms amid a worsening outlook for the country's
struggling real estate sector.
        A default by Country Garden would exacerbate the
country's 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.       
    
    WHO IS COUNTRY GARDEN?
        Until this year, Country Garden was the largest Chinese
developer by sales. The company was previously considered
financially sound compared with peers such as China Evergrande
Group  3333.HK , which defaulted on its debt in late 2021.
        Country Garden had total liabilities of 1.4 trillion
yuan  ($191.46 billion) at the end of June, including nearly $11
billion of offshore bonds and $6 billion of offshore loans. 
        While Country Garden's liabilities are only 59% as big
as those of Evergrande, the world's most indebted developer, it
has more than 3,000 projects across all China's provinces,
compared to around 800 for Evergrande. 
        Regulators and homebuyers are closely watching whether
Country Garden's liquidity stress will make it unable to
complete construction projects, which could stir social unrest. 
        Country Garden has said repeatedly that "home delivery"
is its top priority. 

    HOW BAD IS THE PROPERTY SECTOR CRISIS?
        Since the sector's debt crisis unfolded in mid-2021,
companies accounting for 40% of Chinese home sales have
defaulted, most of them private developers. Chinese developers
have defaulted on more than $114.6 billion of $175 billion in
dollar bonds outstanding since 2021.
        That has led to many unfinished homes, unpaid suppliers
and creditors that are not only financial institutions but also
ordinary folks who bought wealth management products linked to
trust financing.      
    S&P Global Ratings on Monday revised down its forecast for
China's property sales to drop by 10%-15% this year compared to
2022 to around 11.5 trillion yuan-12 trillion yuan. It earlier
forecast a mid-single digit percentage drop. It also said
expected 2024 sales to drop by a further 5%. 
    With property sentiment already very weak, home-buyers could
become even more wary of private developer brands, and home
prices in many areas could come under greater pressure if
Country Garden resorted to fire sales to raise cash.
    Local governments could tighten developers' access to escrow
accounts, where presale funds are kept in order to ensure homes
can be completed and delivered - a top priority set by Beijing. 
    This would in turn squeeze the sector more and lead to
additional defaults even among state-backed developers.    
    
    WILL CENTRAL GOVERNMENT INTERVENE?     
    Beijing has so far not directly bailed out any private
Chinese developer despite some coming to the brink of collapse
since the property crisis escalated in 2021, after a regulatory
crackdown on developers' accumulation of debt.
        With Evergrande now on the brink of collapse after
authorities launched a criminal investigation into its
billionaire founder, some creditors, investors and analysts are
now betting on authorities stepping in to manage the fallout.
        Beijing accelerated efforts to roll out a raft of
measures to boost home-buying, including easing some borrowing
rules, and relaxing home purchasing curbs in some cities, after
Country Garden signalled liquidity stress in August.
        These policies have given major cities such as Beijing a
tiny boost in new home sales, but some worry they might be
short-lived and say more policies are needed.

($1 = 7.3124 Chinese yuan renminbi)

 (Reporting by Clare Jim; Editing by Anne Marie Roantree and
Sonali Paul)
 ((clare.jim@thomsonreuters.com))