China’s largest private property developer, Country Garden’s entire offshore debt will be deemed to be in default if it fails to make a $15 million coupon payment on Tuesday, the end of a 30-day grace period. This is the latest in a series of missed payments by the company, which has been forced to scale back sales amid China’s three-year property market slump. The company, which has over $11 billion of offshore bonds and $6 billion of offshore loans, has already warned that it will not be able to make repayments as they come due.
Last week, the developer missed interest payments on two U.S. dollar bonds, prompting fears of a broader liquidity crisis for Chinese developers. Those worries have dragged the entire market for Chinese junk dollar bonds into distress, with their market value now below 65 cents on the dollar, according to a tracker by Debtwire.
Country Garden’s creditors have voted to extend the repayment deadline for its onshore bond, in a sign that the company is moving towards a solution to its debt problem, sources familiar with the matter said. The vote to delay the payment deadline by three years comes as the lender tries to revive its property sales amid a rout in the market that has left many homebuyers skeptical of buying properties.
Its Achilles heel remains a heavy exposure to smaller cities, where prices are being driven down by oversupply and population outflows. The government’s policy shift to larger cities, which is aimed at bolstering demand, has not helped. This has exacerbated the difficulties faced by property developers and strained household savings, weighing on property sales.
With the property market in crisis and a lack of cash from waning sales, Country Garden needs about 28 billion to 30 billion yuan per month in sales to generate enough cash to pay its creditors and continue building pre-sold homes, according to the company. It also needs to pay a large sum for materials and other costs.
The company, whose onshore debt is held by foreign investors, has already been forced to postpone several planned sales events this year to preserve its credit rating. This has hurt its efforts to recover from a slowdown in the domestic property sector, which accounts for an estimated 25% to 30% of China’s GDP.
Country Garden has been forced to cut dividends and sell off assets to reduce its liabilities and raise money for loan repayments. It has already slashed its investment in new projects and lowered the staff it hires each year. Nevertheless, it is still battling to repay its debts as the broader economy faces weakening consumer demand and a slowdown in exports and manufacturing. The company has hired Houlihan Lokey, CICC, and law firm Sidley Austin to assess its capital structure and formulate a comprehensive solution. The firms will report to the board in late September.