Country Garden crisis worsens as yuan bonds stall and stocks plunge

(Bloomberg) — A crisis is brewing at Country Garden Holdings, formerly the largest Chinese developer, after units halted trading on domestic bonds and stocks plunged in the wake of a Morgan Stanley downgrade.

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The developer, whose problems threaten worse repercussions than struggling peer China Evergrande Group given it has four times as many projects, said it is suspending trading of 11 internal notes issued by the company and its subsidiaries, in a filing to the Hong Kong Stock Exchange on Sunday. . Shares of the company fell 17.4%, after closing below HK$1 for the first time ever last week. His bonds sank him in deep distress, less than 10 cents.

The deteriorating situation with Country Garden, led by one of the richest women in China, Yang Huiyan, is roiling the markets due to its sheer size. It also highlights the challenges China faces in containing a real estate debt crisis that has sparked record defaults, homebuyer protests, and new concerns about trust companies with exposure to real estate projects. Despite being among the first companies selected last year for a program to help developers raise new financing through state guarantees on local bond sales, Country Garden continues to falter.

“We see a higher risk of infection not only across the sector but also that it could spread to the broader economy,” JPMorgan Chase & Co. analysts including Soo Chong Lim wrote in a research note.

In a sign of the broader impact, Chinese dollar junk bonds — largely issued by developers — extended their decline by 2 cents, after the index fell to a year’s low last week to around 66 cents. The Bloomberg Intelligence measure for builders is down 4.1%.

Country Garden has not yet defaulted on a public bond payment, but time is running out on a 30-day grace period after it defaulted on coupon payments due Aug. 7 on the $2 bill.

The stakes are huge. Building more than 3,000 housing projects in small towns is a household name and employed around 70,000 people at the end of last year.

Liabilities totaled 1.4 trillion yuan ($199 billion) at the end of last year. To put this number into perspective, it exceeds the annual economic output of a long list of countries including Kuwait. The broader pain in China’s real estate market, where sales are starting to fall again, makes this mountain of debt even harder to manage.

Country Garden said last week that it will record a net loss of between 45 and 55 billion yuan in the first half of this year, compared to a profit of 1.91 billion yuan in the same period of 2022.

The originator is considering rolling over some soon-to-mature securities, and representatives for China International Capital Corp. told some bondholders that its bond underwriting team has been involved in exploring options for yuan notes maturities, people familiar with the matter said in the past. week.

Moody’s Investors Services analysts including Kai Yin Tsang wrote in a research note that Country Garden’s credit pressures “are likely to spill over into the country’s real estate and financial markets.” “Specifically, this is likely to further dampen market sentiment and delay the recovery of China’s real estate sector.”

In a separate statement Saturday, the company said it plans to hold meetings with bondholders regarding payment arrangements in the near future. It confirmed that it will take measures to defuse the risks and protect the legitimate rights of its investors while ensuring home delivery.

“Given its significant exposure in lower-tier cities, we believe it could take years for Country Garden to recover from its liquidity challenges,” Morgan Stanley analysts including Stephen Cheung wrote in a note, lowering their price targets for the shares.

Country Garden apologized on Friday, and pledged that the company would take more robust and effective measures to ensure home delivery and address cyclical liquidity pressures, Chairman Yang Huiyan and Chairman Mo Bin said in a WeChat statement to investors and customers.

In its bond suspension notice, the company said it would “consider adopting various debt management measures” to protect its long-term development in the future.

Here’s a calendar of Country Garden’s upcoming principal bond and interest payments across currencies through September:

– With the help of Jun Cheng.

(He adds more background throughout.)