The hearing getting adjourned for liquidation gave a breather to the embattled Chinese developer which is trying to finalize an offshore debt revamp plan.

Country Garden liquidation hearing for debt

The hearing on Monday, July 29 is the latest in County Garden’s legal wrangling with creditors. This is after Ever Credit, a unit of laminates maker Kingboard Holdings, filed a winding-up petition against it in February.

Ever Credit Limited, a unit of Hong Kong-listed Kingboard Holdings filed the liquidation petition against Country Garden in February for non-payment of a $205 million loan.

The developer defaulted on its $11 billion worth of offshore bonds last year.

The main purpose of a wind-up petition is to speed up the debt-restructuring process by forcing the defaulted company to come up with a repayment plan through negotiations with creditors. The builder said last month that work on its restructuring was continuing and that it had regularly addressed due diligence requests from bank creditors and a key group of bondholders.

Country Garden’s declining sales

Country Garden, once China’s largest developer by sales, continues to struggle amid a prolonged property crisis in the world’s second-largest economy. In June, Country Garden’s contracted sales plunged 73% to 4.3 billion yuan (S$797 million) from a year earlier, according to an exchange filing.

Country Garden grace period

After defaulting on U.S. dollar bonds last year, the distressed real estate giant in May made interest payments for two bonds within a grace period after missing an initial deadline earlier. The move averted a potential test of a Chinese programme to backstop distressed developers’ debt.

Country Garden has become one of the biggest casualties of China’s real estate crisis, with 1.4 trillion yuan of total liabilities, as per report. The Foshan-based developer suspended trade in its shares in the Hong Kong market in March after postponing the publication of its annual report.

Country Garden debt restructuring

A lawyer for Country Garden told the court on Monday that the developer expected to publish offshore debt restructuring term sheets in September, and that it planned to seek approval from the court on that arrangement early next year. 

The hearing into Country Garden’s liquidation petition comes against the backdrop of Chinese authorities stepping up efforts to revive the property sector after it slipped into an unprecedented debt crisis in mid-2021.

Real estate defaulters

Over the last couple of years, a growing list of developers have defaulted on their offshore debt repayment obligations. Many are facing liquidation lawsuits filed by creditors, with the latest being state-backed Sino-Ocean Group. A handful, including sector giant China Evergrande Group, have been ordered to be liquidated so far.

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Sunac China Holdings shares surged as much as 14% on Tuesday after creditors approved its $9 billion offshore debt restructuring plan, the first green light of such a debt overhaul by a major Chinese developer.

Country Garden debt deal

Separately, cash-starved Country Garden debt repayment extension was approved by the creditors on another onshore bond, the last in the batch of eight bonds it has been seeking extensions for, as per sources familiar with the matter, on Tuesday.

Sunac and Country Garden debt deal come as China’s property sector is taking steps to revive itself, which accounts for roughly a quarter of the world’s second-largest economy, with a raft of support measures unveiled over the last few weeks.

China’s Sunac creditors holdings share

China’s Sunac said late on Monday that creditors holding 98.3% of the total value of the shares who attended the vote had approved the restructuring plan proposed and agreed to by some creditors in March. The developer will seek approval of the plan by a Hong Kong court at a hearing scheduled for Oct 5.

As part of the restructuring terms, a portion of its debt would be exchanged into convertible bonds backed by its Hong Kong-listed shares along with new notes with maturities of between two and nine years.

“I will treat it as a positive. We haven’t seen much progress on the offshore market, so this shows at least some Chinese developers are trying to reach an agreement,” said Gary Ng, senior economist at Natixis Corporate and Investment Bank.

If the plan could be implemented well, and depending on whether the recovery of China’s property market could generate sufficient cash flows, investors would be able to get something back, he added.

Sunac stock update

Hong Kong-listed shares of Sunac were up more than 4% at 0310 GMT, while Country Garden was trading 1% higher.

While Sunac is among a string of Chinese developers that have defaulted on their offshore debt obligations since an unprecedented liquidity crisis hit the property sector in 2021, Country Garden has not missed any offshore payments yet.

Property sector future

Major developers in the process of restructuring their debt include China Evergrande Group, whose liquidity crunch was a turning point in the country’s real estate crisis.

Sunac and Country Garden debt deals with creditors will give some breathing room to Chinese developers and help them avoid a default or a messy liquidation process. The success of the Sunac and country garden debt agreements will depend on a recovery in the property sector.

Even as China implements measures to prop up the property sector, house prices have continued to decline. The latest data show new home prices fell at their fastest pace in 10 months in August, while falls in real estate investment and sales deepened.

Can property market revive?

ANZ Senior China Economist Betty Wang said the support measures could spur some “genuine demand” especially ahead of the traditional sale season during late September/early October in top-tier cities.

“However, the pace and the extent of such a turnaround will be much smaller than in previous cycles,” she said in a report published on Tuesday.

“It’s also questionable whether it will kick off a sustainable rebound especially considering the uncertain job outlook, deteriorating income inflows, a shift in expectations, and potential increase in housing supply in the long-term.”

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Country Garden, one of China’s largest real estate developers, is now struggling to meet its debt obligations. It is now within a 30-day grace period to make interest payments on two loans. If Country Garden fails to make these payments, it could default on its debts and trigger a financial crisis.

The problems at Country Garden could have serious implications for the Chinese economy. The company is a major employer and taxpayer, and its collapse could lead to job losses and a slowdown in economic growth.

The Chinese government is likely to take steps to prevent Country Garden from defaulting, but the situation is still uncertain.

Country Garden’s Colossal Debt Pile

Country Garden’s debt situation came as it reported a record $6.7 billion (£5.2bn) loss for the first six months of the year. The Chinese developer said in the statement that it was “deeply remorseful for the unsatisfactory performance.”

Due to Country Garden’s financial crisis, it is also reportedly seeking to extend a deadline for the repayment of another bond. Country Garden’s financial loss announcement adds to concerns about the post pandemic recovery of the world’s second largest economy.

Chinese developer Country Garden’s loss of $6.7bn was reported amid fears of another Evergrande. Its tenuous state has sparked fears of a collapse that could have far-reaching consequences for the Chinese financial system two years after the fall of Evergrande.

Earlier this month, the company warned that Country Garden’s loss could be up to $7.6bn for the first six months of the year. The record Country Garden’s loss was at the bottom end of a 45bn yuan ($6.2bn; £4.9bn) to 55bn yuan estimate issued by the company.

Country Garden’s financial crisis

One of China’s biggest builders, Country Garden has racked up debts of more than $150bn and said this month it had failed to make interest payments on two loans.

It is one of the few major homebuilders to have avoided default since Beijing introduced a “three red lines” policy in 2020 that aimed to reduce debt levels in the highly leveraged sector. The red lines set limits on liabilities-to-asset ratios and ensure companies hold cash reserves equivalent to at least 100% of short-term debt.

If Country Garden does not meet a deadline for a bond payment at the beginning of September, it could become the biggest Chinese real estate firm to crash since Evergrande in 2021.

Country Garden’s debt effect on China

Country Garden, which was China’s largest real estate firm last year, has four times as many building projects underway as Evergrande. When the latter halted construction projects in recent times it infuriated home buyers, who held demonstrations and stopped making mortgage payments in protest.

The Country Garden’s financial loss and cash flow problems have fueled fears that it could spread turbulence through China’s economy and financial system.

The rise of the world’s second-largest economy has been largely founded on property and construction, which account for about a quarter of China’s GDP.

Country Garden’s financial loss

Country Garden’s losses from January to June were on par with estimates it made in early August of 45-55bn yuan. Over the same period a year ago, the group posted a small profit of 612m yuan.

“The shrinkage of the property sector, coupled with the not yet restored confidence of the capital market, exerted mounting pressure on the company’s business operation,” Country Garden said in its filing to the Hong Kong stock exchange.

The earnings report came out as Country Garden is negotiating with creditors to reschedule debt payments so as to avert default.

Country Garden on Wednesday also proposed issuing new stock worth 255m yuan.

The company has “tried its best” to make debt principal and interest payments, it said in the latest filing.

Country Garden’s debt and loss create a domino effect

Country Garden provides work for tens of thousands of people and is ranked by Forbes among the world’s 500 largest companies. Its boss, Yang Huiyan, was until recently the richest woman in Asia.

The woes of Country Garden and Evergrande are causing further weakness to a property sector hit hard by the pandemic and China’s economic slowdown. These problems also discourage potential homebuyers, which could pile pressure on other real estate firms.

In a sign of the market’s weakness, home prices in July fell at the quickest pace in a year, according to government figures.

Authorities are making moves to boost the key sector now, with major cities Guangzhou and Shenzhen taking steps to ease mortgage rules.

Stock update

Country Garden’s stock drop has been steep over the past month. The Country Garden shares were trading around 1% higher in Hong Kong on Thursday morning. Country Garden’s stock dropped by the end of the day.

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