China's Property Giant, Country Garden, Faces Impending Default Amidst Plummeting Property Sales
China's Country Garden faces dire consequences as property sales plummet, raising concerns of a potential default on its colossal $190 billion debt The real estate crisis in China continues to cast a shadow of uncertainty on the company's future
Sign up for CNN's Meanwhile in China newsletter to stay informed about the country's rapid growth and its global implications. In a concerning development, Country Garden has issued its second warning to investors in just over two months, stating that it may not be able to meet its $190 billion debt obligations. This serves as a stark reminder that China's real estate crisis is still ongoing.
The company failed to repay 470 million Hong Kong dollars ($60 million) to overseas bondholders by Tuesday, citing its ongoing liquidity crisis. Previously the largest developer in China, the troubled company has been plagued by multiple defaults in recent weeks. However, due to the persistently weak property market and challenging refinancing conditions, it has struggled to generate sufficient funds to meet its substantial debt obligations.
Sales of apartments plummeted by 81% in September, in contrast to the corresponding month of the previous year. Country Garden acknowledged in a filing to the Hong Kong Stock Exchange on Tuesday that it anticipates being unable to fulfill its offshore payment obligations promptly or within the designated grace periods.
Failure to make payments may result in creditors of the Group demanding immediate repayment of the debt or taking legal action, as stated in the warning.
The worsening situation at Country Garden provides further proof that China's crucial property market is stuck in a prolonged period of decline, which poses a significant risk to the country's economic growth prospects. Experts believe it may take several years to recover from this crisis due to declining housing demand caused by an aging population.
Creditors of Evergrande, a company that defaulted in 2021 and is currently attempting to avoid liquidation, have expressed concern about the risks involved. In a statement to CNN, they stated that the developer's extensive debts could result in an "uncontrollable collapse" due to mishandled restructuring efforts. If such a collapse were to occur, it could adversely affect households and erode confidence in the struggling real estate market, hampering Beijing's attempts to revive the sector.
Massive liabilities
Country Garden reported a record $7 billion loss for the first half of 2023 In late August and said it "may default" if its financial performance continues to deteriorate.
Country Garden currently has approximately $15 billion in debt that is due by June 2024, based on the latest information provided by the company. In addition, its total liabilities amount to around 1.36 trillion yuan ($190 billion). In the event of a default, the company would be required to restructure its debts, while its creditors would have the option to file a winding-up petition against it.
Country Garden has enlisted the services of advisors to assess its liquidity situation and develop a comprehensive solution aimed at mitigating its offshore debt risk and resuming normal business operations. The company did not provide detailed information about the plan, but indicated that China International Capital Corporation Hong Kong Securities and Houlihan Lokey (China) would act as its financial advisors, while Sidley Austin would serve as its legal advisor.
This aerial photo taken on September 28, 2023 shows a housing complex by Chinese property developer Evergrande in Wuhan, in China's central Hubei province.
STR/AFP/Getty Images
China's economy will be hobbled for years by the real estate crisis
Country Garden, a prominent private developer, managed to survive a liquidity crisis that struck China's property sector two years ago. However, recent months have brought a change in this situation. In August, the company admitted to encountering its most significant challenge since its inception in 1992, due to declining sales and a challenging refinancing environment. This unexpected news rattled investors, leading to a widespread decline in Chinese property stocks.
The fact that a previously invincible company was grappling with a financial squeeze emphasized the extent to which the real estate crisis had taken hold. This also underscored the difficulties that Beijing must confront in managing the issue.
Significant uncertainty
Country Garden reported a consecutive decline in sales, with September's figures showing an 81% decrease compared to the previous year. This follows a 72% drop in August and a 60% fall in July. The company expressed concerns about asset disposals, stating that there is considerable uncertainty in this area. Furthermore, it anticipates maintaining a critically tight liquidity position.
It plans to "cooperate and engage in dialogue with all creditors to reach a feasible solution as soon as practicable," it added.
A Bank of China (BOC) branch in Beijing, China, on Tuesday, August 29, 2023.
Stringer/Bloomberg/Getty Images
China takes aim at real estate crisis with new measures to boost economy
If confirmed, a debt restructuring for Country Garden would be the latest for a Chinese home builder.
Evergrande, the developer with the highest amount of debt globally and formerly the second largest in China, was officially declared to be in default towards the end of 2021. Subsequently, the government stepped in to prevent an uncontrolled collapse of the company and appointed a committee focused on risk management to oversee the restructuring process.
In March 2023, the company finally revealed a long-awaited proposal to restructure over $19 billion of its foreign debts and has been actively seeking approval from its creditors ever since.
However, six months later, Evergrande shocked investors by disclosing the detention of its founder and chairman, Xu Jiayin, by Chinese authorities on suspicion of criminal activities, leading to uncertainty regarding the company's future. Sunac China, the third-largest homebuilder in China in 2021, has also suggested reorganizing its liabilities due to difficulties in making payments.
In March, it announced a $9 billion restructuring plan after reaching agreements with a group of influential bondholders. Recently, it obtained approval from a Hong Kong court for the plan, marking a significant milestone for a major Chinese developer and potentially setting a precedent for other companies in the industry.
