A meeting between distressed Chinese property developer Country Garden Holdings and bondholders, who were supposed to vote on an extension plan for the repayment of a 3.9 billion yuan (US$535 million) note due next week, has been postponed, triggering fears among investors that the risks of a default on the debt by the developer, and the potential consequences for the Chinese real estate sector are increasing.
According to sources familiar with the matter, Country Gardens, which had been the largest developer in China, requested the delay of the meeting until August 31st on Friday night. The developer had been hoping at the meeting to delay the payments on the “16 Bi Yuan 05” note, which will come fully due on September 2nd, for three years.
Since Wednesday the company has held several meetings with major bondholders in an effort to convince them to accept the potential deal.
Country Gardens, in its initial proposal, offered holders of the non-public bond the option to be issued a 100,000 yuan payment in October. The company would then have repaid bondholders 2 percent of the principal amount each in October, November, and December.
The remaining principal would be repaid in tranches consisting of 10%, 15%, 25% and 44%, respectively, in September 2024, September 2025, March 2026, and September 2026.
According to Chinese media outlet Caixin major bondholders of the developer include China Guangfa Bank, Bank of China, and China Merchants Bank. Some of the bondholders reportedly are demanding a full repayment.
The company has not defaulted yet on any onshore bonds. However it missed two US bond coupon payments adding up to $22.5 million earlier in the month, starting the clock on a 30-day grace period.
Now global investors concerned with the state of the Chinese economy, Chinese homebuyers, and economists are all keenly focused on the drama, to see if there is another shoe to fall, and what Beijing will do as its economy approaches a potential tipping point. Analysts note a default by the developer could have a much more powerful impact on China’s housing market than the default by China Evergrande Group in late 2021, since Country Gardens has four times as many projects in development.
Analysts note that the 3.9 billion yuan note which will come due next week will be the largest debt instrument of the company which will mature until the end of the year, so it is seen as a litmus test to see if the developer will be able to retreat from the precipice of a default.
Ten more onshore bonds of the developer were suspended from trading in addition to the privately held bond, since August 14.
Raymond Cheng, managing director at CGS-CIMB Securities said, “A proposal [to extend it by three years] is reasonable and this was probably expected by market.”
He went on, “Creditors may fight for a shorter extension, but I think [an extension of at least] 2 years [is acceptable] if Country Garden compromises. It is a negotiation process and Country Garden still has a month to negotiate with bondholders if there’s a 30-day grace period.”
Edward Chan, an analyst with S&P Global Ratings, noted Country Gardens will have to work hard to reach a compromise with its creditors, saying, “If Country Garden defaults on its onshore bond due September 2, it could also trigger cross defaults on its offshore bonds. This would put the company into an even more stressful situation.”
According to an analysis by JPMorgan, the developer and its subsidiaries will face more that $2.5 billion in coupon payments and maturities in both onshore and offshore debt before the end of the year.
