HONG KONG/BEIJING (Reuters) – Country Garden has won approval from its creditors to extend payments on a local private bond, according to sources and a document seen by Reuters, in a major relief for the struggling Chinese developer as well as the crisis-hit real estate sector.
Country Garden (2007.HK) was seeking approval from its creditors to extend the maturity of 3.9 billion yuan ($540 million) of local private bonds in a vote that ended Friday night.
The unprecedented liquidity crisis in China’s huge real estate sector poses a major risk to the faltering post-Covid-19 recovery in the world’s second-largest economy, which has shaken global markets.
An extension to Country Garden’s debt repayment buys time for China’s largest private developer to avoid default, which is good news for financial markets and the Chinese government, which has announced a raft of measures to support the property sector.
The extension means the developer can repay the debt in installments over three years, rather than fulfilling its obligations by Saturday. The bonds are not publicly traded.
An official document shared with bondholders showed that in Friday’s vote, 56.08% of Country Garden’s participating local creditors approved the extension, 43.64% opposed and 0.28% abstained.
Country Garden did not immediately respond to a request for comment. The sources, who have direct knowledge of the matter, requested anonymity because they are not authorized to speak to the media.
China’s real estate sector, which accounts for nearly a quarter of the economy, has swung from one crisis to another since 2021 after authorities cracked down on a construction boom fueled by developer debt.
As Country Garden’s financial woes worsened over the past month, Beijing implemented a series of support measures including lowering mortgage interest rates and removing some restrictions on home purchases.
Authorities are set to take further measures, including easing restrictions on home purchases, as they strive to address the deepening crisis in the huge, debt-laden real estate sector, Reuters reported on Friday.
Analysts said the postponement of Country Garden bond repayments may give local bond holders some relief, but there is still a long way to go as China tries to defuse risks in the crisis-hit real estate sector and support the economy.
“Sales in China’s largest cities may see a significant improvement over the next two months, as Beijing lowers mortgage rates and makes them more readily available to buyers,” said Zhou Hao, chief economist at Guotai Junan International.
“However, it remains to be seen how the improvement will trickle down to help developers’ cash flow. Plus, different types of developers are likely to benefit from it very unevenly. Those with more projects in tier-1 cities may benefit first.”
Analysts say the slump in China’s property market is driven by factors more important than the cost of borrowing, including concerns about broader debt in the economy, salary cuts for administrative staff and demographic contraction.
Default risk
Until this year, Country Garden was the largest Chinese development company in terms of sales. The company was considered financially sound compared to peers such as China Evergrande Group (3333.HK), which defaulted on its debt in 2021.
While Country Garden’s commitments represent only 59% of Evergrande’s, it has 3,103 projects across China, compared to Evergrande’s roughly 800 – making the company important for systemic stability.
A Country Garden default would have exacerbated the real estate crisis and put more pressure on its local lenders.
The developer’s financial troubles became public last month after it defaulted on two dollar installments totaling $22.5 million, raising fears that the country’s worsening mortgage debt crisis could spill over into the broader financial sector.
Country Garden still faces another big challenge next week, when the grace period expires on last month’s missed coupon payments totaling $22.5 million on offshore dollar bonds.
The developer also has dollar coupon payments on its other offshore bonds due each month for the rest of 2023. It has onshore bond payments totaling 12.6 billion yuan by the end of the year, according to CreditSights.
Moody’s cut Country Garden’s credit rating by three notches to Ca from Caa1 on Thursday over concerns it could be on the brink of default. She said that the company faces a scarcity of liquidity and that recovery prospects for bondholders may be weak.
Country Garden warned on Wednesday of the risk of default if its financial performance continues to deteriorate, and said it was “deeply remorseful” for its record first-half loss.
(Reporting by Xie Yu in Hong Kong and Kevin Huang and Li Ju in Shanghai; Preparing by Muhammad for the Arabic Bulletin) Editing by Sumit Chatterjee and William Mallard
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