Default of Country Garden

Debt Threatens Country Garden After $7B Loss, Default Warning

Country Garden Holdings Co., one of China’s leading property developers, is grappling with an alarming financial crisis, sparking concerns of a potential debt default and operational jeopardy. The company, headquartered in Foshan, has sounded the alarm after reporting an unprecedented first-half loss of approximately $7 billion, a staggering blow that reverberates throughout the real estate sector.


In a stark warning issued on Wednesday, Country Garden acknowledged the possibility of failing to meet its debt obligations if its financial situation continues to deteriorate, a scenario that could lead to a default. This announcement also underscores considerable uncertainties that cast doubt on the company’s capacity to sustain ongoing operations.


The prevailing distress within Country Garden highlights the deep-seated crisis enveloping China’s real estate landscape. Previously regarded as a prominent player in the industry, the firm now confronts an escalating debt crisis that could potentially surpass the challenges faced by its counterpart, China Evergrande Group, given its expansive portfolio containing four times the number of property projects.


Morgan Stanley analysts, including Stephen Cheung, have emphasized the critical importance of swift financial support from regulators in the upcoming weeks to avert a default scenario. Nonetheless, these analysts have indicated diminishing prospects of such intervention, leaving the company in a precarious situation.


This turmoil adds to broader apprehensions concerning China’s economy, the second-largest globally. Authorities have been hesitant to implement substantial stimulus measures to counteract the ongoing economic slowdown. In recent weeks, signs of contagion stemming from the real estate turmoil have emerged, including missed payments by significant shadow banks and a bond crisis among Hong Kong developers.


Country Garden is presently engaged in negotiations with bond investors and financial institutions to extend the maturity of its debt. The company has already missed interest payments on select dollar-denominated bonds, with critical deadlines looming in the coming weeks. Stakeholders are facing a pivotal decision regarding a yuan bond extension plan, coupled with impending grace period expirations for dollar-note coupon payments totaling $22.5 million in early September.


Analysts at JPMorgan Chase & Co., including Karl Chan, have expressed concerns over the company’s future viability. They assert that Country Garden’s growth prospects have been severely hampered, leaving the firm focused primarily on delivering existing projects until its land resources are depleted.


The market has responded to this turmoil, with Country Garden’s bonds experiencing severe distress. A $1 billion note set to mature in January is currently trading at less than 13 cents on the dollar. Meanwhile, the company’s stock witnessed a minor increase of 1.1% in Hong Kong on Thursday, attributed in part to the loss falling within earlier projections. Nevertheless, the stock’s value has plummeted by 67% this year, transforming it into a penny stock.


Country Garden’s interim financial report for the first half of the year, ending June 30, unveiled a net loss of 48.9 billion yuan ($6.7 billion), a significant departure from the 612 million yuan profit reported in the preceding year. Despite a notable 39% increase in revenue, the company struggled due to reduced sales volume and prices, compounded by impairments on properties under development and financial assets.


The company has acknowledged its failure to adopt timely measures to address the market slowdown, revealing an underestimation of the risks tied to its reliance on lower-tier property markets.


Key metrics from the report include a core net loss of 45.3 billion yuan, a reduction in total debt to 257.9 billion yuan, and a cash balance of 130.6 billion yuan, inclusive of restricted funds.


In response to its predicament, Country Garden has outlined intentions to explore various debt management strategies to alleviate liquidity pressures. The company remains committed to maintaining stable operations and safeguarding investor value. Despite the ongoing challenges, the firm remains determined to fulfill project deliveries and anticipates eventual stabilization and rejuvenation in the real estate sector.


Source: Bloomberg


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