China’s largest developer appears to be preparing for default on more than $17 billion in offshore debt obligations as it approaches a 17 October bond payment deadline amid collapsing sales.
Country Garden Holdings alerted the Hong Kong stock exchange early on Tuesday that it has hired investment banks Houlihan Lokey and China International Capital Corporation (CICC) as well as law firm Sidley Austin to advise on its finances and liquidity, pointing to a debt restructuring as it admitted to missing HK$470 million ($60 million) in bond payments due on Monday (9 October).
“The Company will actively pursue offshore liability management measures and develop a holistic solution in a fair and equitable manner to achieve a sustainable capital structure, while respecting the existing legal status and ranking in right of payment of all creditors,” Country Garden president and executive director Mo Bin said in the statement.
The company explained in the filing that, during the first nine months of this year its contracted sales fell to just less than RMB 155 billion ($21.7 billion), which marked a decline of 43.9 percent from 2022 levels and represented a more than 65 percent drop from the same period two years ago.
In acknowledging its failure to pay its bond obligations on Monday, which including coupon payments on 2024 and 2026 notes (both of which provide 30 day grace periods), Country Garden warned investors that more bad news may be on the way.
“The Company also expects that it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, including but not limited to those under the US dollar notes issued by the Company,” the statement read. Country Garden will default on a separate set of offshore bonds if it fails to pay a $15 million coupon payment by 17 October.
The chance of the Guangzhou-based developer’s first formal default raises the specter that creditors holding its $10.96 billion in offshore bonds and $5.81 billion in other non-RMB debt could demand immediate repayment in a cross-default scenario, as Country Garden acknowledged in its statement.
“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.
Investors in Chinese developer debt are already reeling from China Evergrande Group’s abandonment last month of a deal to restructure its $31.7 billion in offshore obligations. A group representing Evergrande’s offshore creditors said in statement on Monday that they had been blindsided by the developer’s cancellation of the restructuring deal on 22 September and that it had not been able to get new information from the company since that time.
Both Houlihan Lokey and Sidley Austin are also advising Evergrande on its restructuring, with the professional services pair having become the restructuring consultants of choice for cash-strapped mainland developers. Defaulting mainland builders Sunac China Holdings, Sino-Ocean Group Holding, Modern Land and Kaisa Group have also all said that they are working with one or both of the firms to develop restructuring deals.
Sales Slide Accelerates
In its statement, Country Garden said that its RMB 6.17 billion in September contracted sales were down 81 percent from last year’s figures, and marked the sixth-straight month of decline. With contracted sales now down 43.9 percent in the first nine months of the year, the developer’s position is deteriorating after its sales for January through July were down just less than 35 percent from the same period in 2022.
Despite China’s central government having prioritised policy support for the property sector and local authorities rolling back earlier sales restrictions, Country Garden indicated that these measures, as well as its own efforts to manage its finances, were not sufficient to prevent payment failures.
“Despite the Group’s best endeavors to explore various options for cash generation, such as asset disposals, in order to continue to meet its financial commitments, prevailing market conditions have made it difficult for the Group to procure sufficient cash toenhance its liquidity position within a short period of time,” the company said. “Consequently, the Group’s cash position remains under significant pressure.”
As it prepares to join China’s restructuring developer club, Country Garden said, “We wish to pursue a holistic solution to fully address the Company’s current offshore debt risk, to enable the Company to restore its business operations and achieve long-term healthy development and, to the greatest extent, protect the rights and interests of all stakeholders including customers, employees and creditors.”
The company promised further updates when appropriate.