Analysis-Default evaded, however Country Garden’s upcoming financial obligation payments stir concerns By Reuters

By Xie Yu and Davide Barbuscia

HONG KONG/NEW YORK (Reuters) – Creditors of Country Garden Holdings are skeptical the Chinese designer will remain in a position to service financial obligation that will come due later on this year without liquidity assistance, after it avoided a disastrous default today at the last minute.

With its monetary scenario precarious and potential customers of China’s residential or commercial property sector staying grim, the overseas lenders anticipate the nation’s biggest personal designer to get liquidity assistance quickly or for it to go through a financial obligation revamp.

Country Garden’s monetary problems have actually ended up being the current to strike China’s residential or commercial property sector, which was as soon as a pillar of development for the world’s second-largest economy however has actually become its greatest drag because 2021 in the middle of an unmatched liquidity crisis.

The business paid $22.5 million in dollar bond vouchers on Tuesday hours ahead of a grace duration due date, drawing back from the verge of default for the 2nd time in 4 days and bringing relief to the residential or commercial property sector.

“Historically, external creditors have really not done well in restructurings coming out of China,” stated Edward Al-Hussainy, senior currency and rates expert and head of emerging market set earnings Research at Columbia Threadneedle, which holds a few of Country Garden’s dollar bonds.

“The fact that they paid this coupon tells me that there’s some conversation happening at the company management level and very likely between company management and government at this stage, that liquidity, or some form of liquidity support, is becoming more likely.

“Otherwise, servicing this financial obligation under today’s situations makes no sense.”

Country Garden, one of the few large Chinese developers that have not defaulted on debt obligations, has been facing liquidity pressure with reduced available funds as sales plunged, its interim financial statements show.

It posted a 48.9 billion yuan ($6.68 billion) first-half loss, a record for the developer.

Its net gearing ratio, which measures financial leverage, rose to 50.1% in the first half from 40% at the end of 2022. It has around $14.8 billion worth of debt due within 12 months, while its cash levels are around $13.8 billion. The company’s total liabilities were around $191 billion, unchanged from end-2022.

Country Garden has at least five coupon payments due this month, including two relatively sizable dollar bond coupons worth $15 million due on Sept. 17, and $40 million on Sept. 27, each with a 30-day grace period.

The developer may delay the upcoming coupon payments, use the grace period to come up with a restructuring plan, and try to convince investors to accept it, said a portfolio manager with a U.S. asset manager, which owns some Country Garden bonds.

Given the company’s cash flow will remain tight as property sales recovery is expected to be sluggish, it would be a tough balancing act for the company in the absence of “significant” liquidity support, said the portfolio manager.

The portfolio manager declined to be named as they were not supposed to speak to the media.

Country Garden declined to comment.

DISTRESSED LEVELS

Investors are focusing on near-term sales prospects for Country Garden and its peers after the Chinese authorities rolled out a raft of support measures for the embattled property sector in the last few weeks.

Those measures included lowering existing mortgage rates and preferential loans for first-home purchases in big cities, but analysts say more was needed to stabilise the sector, restore consumer confidence and sow the seeds for an eventual recovery.

Despite those measures, China’s new home prices fell for the fourth month in August, according to a private survey on Friday, as the property debt crisis kept confidence at a low ebb.

“Country Garden will most likely make complete usage of the grace durations…it still looks challenging for them to produce adequate money for the upcoming payments, both onshore and offshore,” said Ting Meng, a senior credit strategist at ANZ.

Benjamin Bennett, head of investment strategy and research at UK asset manager Legal & General Investment Management, said it would be a “substantial surprise” if the designer continued paying vouchers.

“Hopefully they are using the time they’ve bought themselves in recent days to work out a proper restructuring plan so we don’t have the same extended uncertainty we had with earlier defaulters,” he stated.

($1 = 7.3260 renminbi)