China’s largest private property developer issued a warning late on Wednesday that it faces default risks because its financial performance is declining.
Country Garden said it posted a record net loss of 48.9-billion yuan ($6.72 billion) for the first half of this year – a result which it “felt deeply remorseful about”.
That compared to a 6.7bn yuan net loss in the second half of 2022 and a 612-million yuan net profit in the first half of 2022.
Meanwhile, the embattled developer faces a critical test of investor confidence on Thursday, as creditors prepare to vote on its proposal to delay payment for an onshore private bond.
Bid to extend onshore private bond
The vote, which is expected to conclude by 10pm (1400 GMT) Hong Kong time, will be a key hurdle Country Garden will have to overcome as it strives to avoid default amid a spiralling financial crisis.
Country Garden has been talking with its onshore creditors to extend a 3.9 billion yuan ($535.4 million) private bond due on Saturday.
According to the extension plan, the company will repay the onshore private bond in seven installments ending in September 2026. Three initial installments will be made this year, with 2% of the principal each. The coupon will be kept at the same rate at 5.65% and paid annually.
The company is also seeking to add a 40-day grace period for the repayment of the bond, which is yet to be approved by onshore investors. It might have more time to negotiate for the bond extension if onshore investors forego the longer grace period, some bondholders said.
Country Garden’s Hong Kong-listed shares were up around 1.1% on Thursday morning.
Fears of contagion from its $192bn debt crisis
As pressure mounts on the real estate market, two of China’s biggest cities eased mortgage curbs and Chinese authorities urged cities to broaden the definition of first-home mortgages in hopes of reviving consumer demand for property.
A report by Goldman Sachs said it sees “a high possibility” that more big cities will follow suit in easing mortgages. If the move was broadly implemented in large cities it “may provide a modest growth impulse to the property market”, although the magnitude was likely to be measured, it added.
China’s real estate market, which accounts for roughly a quarter of the economy, is grappling with a debt crisis that has rattled global markets and sparked fears of contagion at a time when the country is already struggling with a broader slowdown.
The property sector has seen many company defaults since late-2021, resulting in uncompleted homes and unpaid suppliers and creditors.
The liquidity stress in Country Garden became public this month after it missed two dollar-coupon payments – which the developer confirmed for the first time on Wednesday – and sought to extend an onshore private bond repayment, deepening contagion fears.
“If the financial performance of the group continues to deteriorate in the future, the group might not be able to fulfil the financial covenants of these borrowings, which may result in default in these borrowings and cross-default in certain other borrowings,” the developer said in its filing on Wednesday.
It added it will consider debt management measures to cope with the remaining overseas debts coming due through the end of June next year, including negotiations with onshore banks on renewing and extending existing loans.
Country Garden said its revenue in the first half rose 40% from a year earlier but its cost of sales surged 73%, while total liabilities were unchanged from the end of 2022, at 1.4 trillion yuan ($192 billion).
Its total interest-bearing debts decreased to 257.9 billion yuan, of which 108.7 billion yuan would be due within 12 months, while it had total cash of 101.1 billion yuan.
“The company feels deeply remorseful for the unsatisfactory performance,” it said.
Talks with offshore creditors, new share issue
Some offshore creditors of Country Garden are in talks with a New York-based law firm and are considering options including legal ones, by forming a group if the company seeks to restructure its debt.
Kobre & Kim LLP said on Wednesday it had been in discussions with creditors interested in forming a group and weighing their options, including some specialized in distressed credit and experienced in using strategies to improve value in debt restructuring cases.
Early on Wednesday, Country Garden said it would issue HK$270 million ($34.4 million) worth of new shares to an investment unit of Hong Kong-based manufacturer Kingboard Holdings, which would reduce its outstanding loan to the unit to HK$1.6 billion.
The company said the issue would help “preserve cash resources… and reduce the gearing level.” The new shares, representing 1.25% of the enlarged share capital, would be issued at HK$0.77 each, a 15.4% discount from Tuesday’s closing price.
Many Chinese developers have so far posted losses or drops in profit for the first half as nationwide sales soften.
State-backed China Resources Land told an earnings conference on Wednesday it expected the country’s home sales in the full year would be flat from last year or register a small decline, as demand was dropping long term.
It added that the number of visitors to its sales showrooms continued to drop in August.
China Resources Land was one of the few developers that posted a rise in profit in the first half. Its net profit rose 30% from a year earlier.
- Reuters with additional editing by Jim Pollard
NOTE: Details were added to this report about the onshore bond-extension vote on August 31, 2023.