Chinese construction giant in distress
Country Garden is at risk of default
8/30/2023, 8:45 p.m
After Evergrande, the largest real estate group in China, a second housing giant is struggling to survive. Country Garden reports billions in losses for 2023 and has to fear for its solvency. Foreign donors are alarmed.
After losing billions, the struggling Chinese real estate group Country Garden is warning of a default on some bonds. “Should the group’s financial performance continue to deteriorate in the future, the group may not be able to meet the financial covenants of these loans,” the group said in Hong Kong. This could lead to a default of these bonds. There is also a risk that some of the company’s other bonds could be affected. Country Garden now wants to consider measures to pay off the remaining foreign debt, which is due by the end of June next year. “The company deeply regrets the unsatisfactory performance,” said management.
Country Garden’s loss was 48.9 billion yuan in the first half. The minus was not quite as high as feared – but it was still more than seven times as much as the 6.7 billion yuan in the second half of 2022. Country Garden had previously warned of a shortfall of up to 55 billion yuan.
Creditors prepare for debt restructuring
Meanwhile, Country Garden’s foreign creditors are apparently preparing for a possible debt restructuring of the real estate giant. They had obtained legal advice from him, lawyer John Han from the law firm Kobre & Kim told Reuters. The options discussed include the formation of an interest group in order to have a better negotiating position with the group.
Country Garden is the largest private real estate developer in the People’s Republic to date and has specialized in properties in smaller towns. The company is sitting on a mountain of debt equivalent to 178 billion euros. According to Han, three quarters of this sum comes from foreign donors. According to Country Garden, there are currently hardly any free funds for debt service because a large part of the money is in escrow accounts to pay construction companies for the completion of real estate. According to experts at investment bank Nomura, Country Garden currently has almost a million homes under construction. Her colleagues at the US bank JPMorgan put the cost of completing it at almost 40 billion euros.
Separately, Country Garden announced a capital increase. The real estate company wants to issue new share certificates with a volume equivalent to almost 32 million euros to one of its creditors, Kingboard. This reduced the debts at the investment subsidiary of the laminate provider, Ever Credit, to around 187 million euros.
Chinese authorities intervene
In response to the precarious financial situation, Country Garden stopped trading some of its Chinese bonds a few weeks ago. According to a media report, the company is planning a debt restructuring. Country Garden is also negotiating with the holders of a $500 million domestic bond due Saturday to extend the repayment period. The decision on this must be made by Thursday. By early August, Country Garden had already missed interest payments on two domestic dollar bonds. The grace period for this runs until September 5th.
The entire Chinese real estate industry is in trouble as real estate prices fall due to the weakening economy and fresh loans become more expensive at the same time. The most prominent example of this is China Evergrande, the world’s most heavily indebted real estate company at the equivalent of 303 billion euros. The sector accounts for a quarter of the economic output of the People’s Republic.
In order to prevent the crisis from worsening, the state jumps into the breach. The metropolis of Guangzhou, for example, relaxed the rules for granting preferential loans to real estate buyers. Beijing, Shanghai and Shenzhen could follow suit, as could a dozen smaller major cities. According to insiders, state-owned banks will also lower interest rates on existing mortgages.