2023-09-07 08:44:58
Country Garden Holdings’ creditors doubt the Chinese developer will be able to service debt due later this year without cash, following averting a catastrophic default at the last minute this week.
With its financial situation precarious and the outlook for China’s real estate sector remaining bleak, offshore creditors expect the country’s largest private developer to soon get cash assistance or undergo debt restructuring.
Country Garden’s financial woes are the latest to hit China’s real estate sector, which was once a pillar of growth in the world’s second-largest economy but has become its biggest drag since 2021 amid a cash crunch. unprecedented.
The company paid $22.5 million in dollar bond coupons on Tuesday, hours before a grace period expired, walking away from the brink of default for the second time in four days and relieving the real estate sector.
“Historically, external creditors haven’t reacted really well to restructurings coming out of China,” said Edward Al-Hussainy, senior currency and rates analyst and head of emerging markets fixed income research at Columbia Threadneedle. , which owns a portion of Country Garden’s dollar bonds.
“The fact that they paid that coupon indicates to me that there is a conversation at the corporate management level and very likely between corporate management and the government at this point, that liquidity, or some form of liquidity support, becomes more likely.
“Otherwise, servicing this debt in the current circumstances makes no sense.
Country Garden, one of the few major Chinese developers not to have defaulted on its debt obligations, has faced liquidity pressure with reduced available funds due to falling sales, as shown by its interim financial statements.
It posted a first-half loss of 48.9 billion yuan ($6.68 billion), a record for the developer.
Its net debt ratio, which measures financial leverage, fell from 40% at the end of 2022 to 50.1% in the first half. The company has debt worth around $14.8 billion that matures within 12 months, while its cash levels are around $13.8 billion. The company’s total liabilities were approximately $191 billion, unchanged from year-end 2022.
Country Garden has at least five coupon payments due this month, including two relatively large dollar bond coupons worth $15 million on Sept. 17 and $40 million on Sept. 27, each with a grace period of 30 days.
The developer might delay future coupon payments, use the grace period to come up with a restructuring plan and try to convince investors to agree to it, said a portfolio manager at a U.S. asset manager, which owns some Country Garden bonds.
Given that the company’s cash flow will remain tight as the recovery in property sales is expected to be slow, it would be difficult for the company to find a footing without “meaningful” liquidity support, said the portfolio manager.
The portfolio manager declined to be named because he was not supposed to speak to the media.
Country Garden declined to comment.
LEVELS IN DIFFICULTY
Investors are focused on the near-term selling prospects of Country Garden and its peers following Chinese authorities rolled out a series of support measures for the struggling real estate sector in recent weeks.
These measures included lowering existing mortgage rates and preferential loans for the purchase of a first home in major cities, but analysts say more needs to be done to stabilize the sector, restore consumer confidence and throw the basis for a possible recovery.
Despite the measures, new home prices in China fell for the fourth month in August, according to a private survey on Friday, with the housing debt crisis keeping confidence low.
“Country Garden will likely make full use of the grace periods, but it still seems difficult for them to generate enough cash for upcoming payments, both onshore and overseas,” said Ting Meng, a credit strategist. senior at ANZ.
Benjamin Bennett, head of investment strategy and research at UK asset manager Legal & General Investment Management, said it would be a “huge surprise” if the developer continued to pay the coupons.
“Hopefully they use the time they have gained over the past few days to come up with a proper restructuring plan so that we don’t have the same prolonged uncertainty that we have experienced with previous deadbeats,” he said. he declared. ($1 = 7.3260 Chinese yuan renminbi) (Reporting by Xie Yu in Hong Kong and Davide Barbuscia in New York; Writing by Sumeet Chatterjee and Muralikumar Anantharaman)
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