What Lies Ahead for Country Garden after Debt Default?

China's major real estate company, Country Garden, has officially defaulted on its debt as it was unable to meet the deadline for bond repayment, which was set for October 18. Consequently, a group of international banks and investors confirmed on Thursday that a "failure to pay" incident had taken place, enabling investors to claim payouts on credit default swaps (CDS).

A credit default swap (CDS) is a financial derivative that enables investors to exchange their credit risk with another investor. It operates similar to an insurance product, providing buyers protection in case of potential losses resulting from a company or government's debt default.

On Wednesday, the Credit Derivatives Determinations Committee, responsible for supervising the CDS market, held a meeting to deliberate on whether the failure of Country Gardens to make a bond payment would activate CDS payouts.

According to a statement released on Thursday, twelve committee members, comprising of investment banks and hedge funds such as JP Morgan, Goldman Sachs, and Citadel Americas, have unanimously acknowledged Country Garden's involvement in a "failure to pay" incident last week.

Country Garden, previously China's largest homebuilder, failed to meet the payment deadline for a $500 million bond amidst its ongoing liquidity crisis. The company had previously cautioned investors about potential defaults on its offshore debt, following a significant decline in sales reported last month.

"Given [Country Gardens'] consistent failure to meet offshore payment obligations within grace periods, it comes as no surprise that the formal default will negatively impact homebuyers' trust in the Country Gardens brand," stated Jeff Zhang, a Morningstar equity analyst, in a research note. The escalating crisis at Country Garden provides further proof that China's crucial property market is experiencing a severe downturn, which presents a significant risk to the country's growth potential. Analysts believe that it may take several years to recover from this slump due to dwindling housing demand caused by an aging population.

"According to John Bringardner, head of Debtwire, a New York-based provider of data and news on the fixed income market, Country Garden, once perceived as a reliable choice, has now faced a default. This event indicates that there are no longer any secure options remaining in this industry."

Whats next for Country Garden?

As of June's end, Country Garden's outstanding debt due within 12 months stood at approximately $15 billion, as per the latest information disclosed by the company. The company's overall liabilities amounted to around 1.36 trillion yuan ($190 billion).

Following its official declaration of default, the company is currently battling for survival. It is necessary to restructure its debts, and there is a possibility of creditors filing a winding-up petition against the company. Hiring specialized restructuring advisors has already been undertaken by Country Garden.

Zhang stated that the survival of Country Gardens relies on bondholders accepting a proposed repayment schedule, given the company's limited liquidity due to the sales slump. Bringardner anticipates that Country Garden will emulate Sunac China in restructuring its operations, rather than following the path of Evergrande, which has experienced a challenging and protracted process, including the detention of its chairman, and may ultimately face a chaotic collapse.

Sunac, the third-largest homebuilder in China in 2021, is currently undergoing a restructuring of its debts due to difficulties in making payments.

In March, the company revealed a $9 billion restructuring plan after successfully negotiating with a group of significant bondholders. In early October, it obtained approval from a Hong Kong court for the plan, setting a precedent for other major Chinese developers. This could serve as a blueprint for similar industry players.