China's largest developer by sales, Country Garden (HK:2007 and (CTRYY) ), appears set to default on two of its bonds, a sign that the difficulties faced by the Chinese property sector are only deepening.
Country Garden revealed this week that it has failed to pay the coupon valued at US$22.5 million on two U.S.-dollar-denominated bonds, confirming indications from investors that they had not been paid on time on Monday.
The US$500 million bonds are due in February 2026 and August 2030. There is a grace period of 30 days on the bond payments before the bonds go into technical default, but it is questionable whether Country Garden will be able to stave off that status.
Country Garden, which specializes in mass-market housing and large-scale, city-size developments, had total liabilities of C¥1.4 trillion (US$194 billion) at the end of last year, according to its annual report.
Its debt has been a favorite of international investors, who sought such high-yielding bonds to goose returns when times were good. But the value of the bonds has now shrunk to cents on the dollar -- around 12 cents, to be precise.
Stockholders have fared equally poorly. Country Garden canceled a US$300 million share placement last week at the last minute and admits it is experiencing "liquidity pressure" and is looking to "actively optimize" its debt.
Investors have been waiting for signs of a turnaround... and waiting... and waiting. The prospects of any sustained boost to property values or sales activity appear to depend now on the introduction of stimulus by the Chinese government. And that is a step that Beijing is loath to take.
Country Garden had appeared better financed than China Evergrande, the highest-levered developer in China and the first to run aground. There have been glimmers of hope, such as when officials from the People's Bank of China met with executives from Country Garden and seven other major bond issuers, including fellow developers Longfor Group (HK:0960 and (LGFRY) ) and CIFI Holdings (HK:0884 and (CFFDY) ). The central bank said it would increase financial support for those issuers' bonds and also would meet "reasonable" financing needs for developers.
Country Garden said last week that it would need "guidance and support from the government" as it predicted it would turn a loss for the first half of this year. The company said it was considering "various countermeasures to ensure the security of cash flow, including but not limited to reducing various operating expenses, accelerating loan collection arrangements, actively expanding financing channels, and managing and optimizing debt repayment arrangements."
Country Garden had been looking to raise US$300 million by selling shares at HK$1.30, a 17.7% discount to the price where they were trading at the time. But it scrapped the sale at the last minute with no explanation.
Shares in shambles
Country Garden's shares have been decimated. They peaked in 2018 above HK$17, although that was one of those short-lived spikes in Chinese shares that often develop around the times of government efforts to stimulate stocks. It matched a strong rally in the CSI 300 index, which like Country Garden fell back to earth hard in 2019.
The nadir came last October, when Chinese shares bottomed as the country attempted to stamp out Covid-19 entirely, a task that ultimately proved futile. Country Garden's stock fell close to HK$1, with the risk of delisting if it fell below that level.
With snap Covid lockdowns occurring without warning around the country, economic activity ground to a halt and citizens were afraid to travel for fear of falling afoul of the "Covid roulette" that could see you blocked from travel and unable to return home because you had been in extended contact with someone who contracted the disease.
Crowded property showrooms were not the place to be. Chinese stocks did spark to life after China scrapped its anti-Covid measures overnight last December. That prompted Country Garden shares to double between October and the end of January.
But the rot has resumed. Since that late January gasp of optimism, the stock has dropped by two-thirds. The shares also are very close at today's closing price of HK$1.04 to the price at which the company needs to explain itself to the Hong Kong Stock Exchange.
All of the above has had a devastating effect on the wealth of Country Garden heiress Yang Huiyan, once China's richest woman. Now the company's chairperson, she has seen her fortunes drop more than 80% since June 2021, from a peak of US$28.6 billion on Bloomberg's billionaires ranking to US$5.5 billion now. Her father Yang Guoqiang, Country Garden's founder, transferred a 70% stake in the company to her in 2007 before its US$1.6 billion initial public offering. But he has stepped back due to age.
It is a similar story for Evergrande founder Hui Ka-yan, who has seen his war chest shrink from US$42 billion at its height to US$3.2 billion.
Yang has agreed to transfer half her holding in Country Garden to a charity set up by her sister, although Yang will retain the voting rights. What that holding is worth remains to be seen, as the stock and the company's bonds continue their descent.
