A major Chinese real estate company, Country Garden Holdings Co., has failed to make a payment on its dollar bond for the first time, signaling its financial troubles during a larger crisis in the real estate market in China.
The company missed the deadline to pay the interest on its bond, and this is considered an “event of default.” This means that if bondholders representing at least 25% of the total bond value request it, the trustee, Citicorp International Ltd., must demand immediate repayment of both the principal amount and the interest. So far, there’s no news of such a demand from bondholders.
Country Garden, which is one of the world’s most heavily indebted real estate developers, failed to pay $15.4 million in interest on its dollar bond within a 30-day grace period, after already missing the initial deadline on September 17. It had become almost certain that a default was looming when the company admitted it couldn’t meet its offshore payment obligations on time. Now, it’s likely that the company will undergo one of China’s largest-ever financial restructurings.
A representative from Citigroup chose not to provide any comments regarding the notice sent to Country Garden bondholders by the trustee. When contacted on Wednesday, Country Garden, the construction company, did not immediately respond with a comment.
Country Garden is led by Yang Huiyan, one of China’s wealthiest women, and the company’s significant size plays a crucial role in the country’s economy. The property market and related industries contribute to approximately 20% of China’s overall economic output. This default occurs at a time when Chinese President Xi Jinping is intensifying efforts to boost economic growth. He has been issuing more sovereign debt for infrastructure projects, increasing the budget deficit ratio, and even making an unprecedented visit to the central bank.
As a sign that a major financial overhaul may be on the horizon, the company has recently brought in advisors to assess its financial setup. Their dollar notes, which are a form of debt, are now valued at only about 5 cents on the dollar, indicating that investors don’t expect to recover much of their money. Just a few months ago in June, these notes were trading at nearly 80 cents. Additionally, the company’s stock has plummeted by about 74% this year.
The declaration from Citigroup could be crucial for those who have invested in credit default swaps. A group of banks and investment firms has been asked by market participants to determine if the missed payment on the developer’s debt would trigger these contracts. This decision is expected to be discussed during a meeting of the Credit Derivatives Determinations Committees on Wednesday.
The situation also has broader implications for the bondholders of Country Garden’s dollar-denominated bonds who are trying to come together to negotiate a debt restructuring. Some of these creditors were already considering the formation of groups to collectively address the situation.
For several years, this company held the top position as the largest builder in the country based on the contracts for home sales it had. However, in 2023, it has slipped to the seventh position. Even with this drop, the company still has over 3,000 housing projects in smaller cities and employs approximately 70,000 people. This makes the potential turmoil it faces potentially more impactful than the debt problems experienced by a troubled peer, China Evergrande Group, in 2021, as it has many more projects in progress.
In recent years, the Chinese government has been working to revive the real estate market, especially as developers have faced record levels of debt defaults during an ongoing financial crisis that’s now in its fourth year. The issues started in 2020 when the authorities introduced what they called “three red lines.” These rules set limits on how much debt property developers could carry if they wanted to secure additional loans.
To help address these challenges, the authorities have implemented various measures in recent months. These include relaxing downpayment requirements for homes and reducing some mortgage interest rates to stimulate the real estate market.
Despite these efforts, the situation hasn’t improved much: Property investment decreased by 9.1% during the first nine months of this year, as indicated by last week’s data.
Some potential homebuyers are hesitant to make purchases because they’re worried that construction projects won’t be completed. To illustrate the severity of the issue, Country Garden recently reported an 81% drop in its contracted sales for September compared to the previous year.
So far, the company hasn’t officially defaulted on any domestic bonds. In September, it gained approval from bondholders to extend payments on nine domestic bonds with a total principal of 14.7 billion yuan.
