Country Garden faces key test with onshore bondholders set to vote on extension

HONG KONG (Reuters) -Embattled Chinese property developer Country Garden 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.

The vote, which is expected to conclude by 10 p.m. (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.

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.

On Wednesday, Country Garden – China’s largest private developer – posted a staggering $6.7 billion in first-half losses and warned of default risks.

It said that if its performance continued to deteriorate, it might be unable to fulfill its financial covenants and that may result in default and cross-defaults of certain borrowings.

A default by Country Garden would exacerbate the country’s spiralling real estate crisis and could delay the prospect of a recovery of not only the property market, but the overall Chinese economy.

Cash-strapped Country Garden’s total liabilities stood at about $194 billion at the end of June and its cash crunch has exposed how quickly the housing crisis has deteriorated.

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, Country Garden 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.

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.

Country Garden posted a net loss between January and June of 48.9 billion yuan, versus a 6.7 billion yuan net loss in the second half of 2022 and a 612 million yuan net profit in the first half of 2022.

Country Garden’s Hong Kong-listed shares were up around 1.1% on Thursday morning.

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