China's Country Garden warns it could fail to pay offshore debt obligations

China's Country Garden Holdings said it might not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, as the country's largest private property developer grapples with debt restructuring. "Such non-payment may lead to relevant creditors of the Group demanding acceleration of payment of the relevant indebtedness owed to them or pursuing enforcement action," the company said in a Hong Kong Stock Exchange filing on Tuesday.

The group is currently facing "significant" uncertainty regarding disposing of its assets and its cash position remains under pressure, added the developer, which has $10.96 billion of offshore bonds and 42.4 billion yuan ($5.81 billion) worth of loans not denominated in yuan.

Companies accounting for 40 per cent of Chinese home sales - mostly private property developers - have defaulted on debt obligations since a liquidity crisis hit the sector in 2021, leaving many homes unfinished. The problems have deepened in the past two years as confidence in housing and capital markets dried up, further squeezing developers' liquidity.

Country Garden said it had appointed Houlihan Lokey, China International Capital Corporation (CICC) and law firm Sidley Austin as advisers to examine its capital structure and liquidity position. Morningstar analyst Jeff Zhang said mandating advisers showed "whether the company will default hinges on the outcome of overseas debt restructuring and the next two weeks will be crucial." "We do not expect Country Garden's liquidity to materially improve as homebuyers and financial institutions may continue to stay on the sidelines," he said.

The company was due on Monday to pay $66.8 million in coupons on 2024 and 2026 dollar bonds, although the payments have a 30-day grace period.

Country Garden has not disclosed whether the coupon payment was made. It did not make a principal payment of HK$470 million ($60.04 million) on certain debts, it said in the filing, without providing further details.

The developer had been working towards announcing a restructuring of its offshore debt, Chinese media reported on Monday.

Country Garden faces another big test next week when its entire offshore debt could be deemed in default if it fails to pay a $15 million September coupon by Oct. 17.

ONSHORE RESTRUCTURING

Country Garden said on Tuesday it had won 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), which it said provided it "with the time and space to focus on the recovery of its business operations."

The developer's shares rose 3 per cent in early trading on Tuesday, having lost nearly 70 per cent of their value since the start of the year.

"The company's previous model was not sustainable, they are now addressing it, trying to scale down their debt burden and make their business size appropriate," said Sandra Chow, CreditSight's co-head of Asia Pacific research. "There is a smaller property market overall and it makes sense to adapt to that," she said, adding that a restructure would look to extend debt maturity repayments, reduce bond coupon rates and accelerate asset sales. Country Garden said it would make "its best effort to ensure the delivery of properties, which is the group's most critical corporate responsibility and is the key pillar to safeguard the property market."

China's government has recently implemented a range of measures from reducing deposit requirements to cutting existing mortgage rates in some cities to help renew confidence among home buyers to support the property market. "The difficult situation shows that Chinese developers face severe liquidity pressure from weak home sales, and repayment to bondholders is still a lower priority," said Gary Ng, senior economist at Natixis Corporate and Investment Bank."More developers will try to extend and restructure their debt to mitigate the stress, but how fast it can be is still a big question mark."