© Reuters. FILE PHOTO: A construction site of residential buildings by Chinese developer Country Garden is pictured in Tianjin, China August 18, 2023. REUTERS/Tingshu Wang/File Photo
By Xie Yu and Shuyan Wang
HONG KONG/BEIJING (Reuters) -China’s Country Garden made interest payments on U.S. dollar bonds hours ahead of a grace period deadline, a person close to the firm said, pulling back from the brink of default for the second time in four days and bringing some relief to the country’s crisis-hit property sector.
China’s largest private property developer failed to pay coupons on the bonds totalling $22.5 million due on Aug. 6, exacerbating fears over how much cash it has left and keeping markets on tenterhooks throughout the bonds’ 30-day grace periods.
Though the amount was modest, failure to pay would have undermined fragile hope in financial markets that China’s steady drip feed of policy stimulus was starting to stabilise the economy and its struggling property market.
It would also have raised the prospect of default on other dollar bonds as well as creditor calls to accelerate payments, bondholders and lawyers said, while heightening concern of a spillover into the banking system in the world’s second-largest economy.
Country Garden also offered on Tuesday to extend repayment of eight onshore bonds worth 10.8 billion yuan ($1.48 billion) by three years, according to people with knowledge of the matter and documents seen by Reuters.
Those bonds, issued by Country Garden and a unit, were set to mature and be puttable – an option given to bondholders to sell the notes back to the borrower at a fixed date – in 2023 and 2024, showed the documents sent to onshore creditors.
Country Garden did not respond to a request for comment.
The people familiar with the matter declined to be identified as they were not authorised to speak with media.
“Country Garden is trying hard to fulfil debt obligations but whether this can continue will depend on the effectiveness of this round of stimulus and regulatory relaxation (of curbs on the property sector),” said Gary Ng, Natixis Asia Pacific senior economist.
The latest government stimulus measures over the last few days included lowering existing mortgage rates and preferential loans for first-home purchases in big cities, but many analysts say more support will be needed to stabilise the property sector, restore consumer confidence and sow the seeds for an eventual recovery.
STUTTERING ECONOMY
Country Garden’s cash squeeze highlights the fragile state of China’s real estate sector, which accounts for roughly a quarter of the economy and whose situation has deteriorated since a government campaign against high leverage began in 2021.
Making matters worse is a lacklustre post-pandemic economic recovery.
Services sector activity grew at its slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the economy and stimulus measures failed to meaningfully revive consumption.
Global stock markets fell on Tuesday as the weak services data rekindled worries over the health of China’s economy, though factory surveys hinted at some signs of steadying.
“With domestic demand weak and house prices on the slide in smaller Chinese cities in particular, there are still worries about the fragility of the real estate sector,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown, U.K.
“Stimulus efforts to increase mortgage lending are welcome but a much larger package of support is likely to be needed to restore more confidence in the sector, and put exposed property firms on a firmer footing.”
DODGE, DUCK, DIP AND DIVE
Some of Country Garden’s dollar bonds added 2 points to their prices after news of Tuesday’s payments – a sign the bonds were trading with accrued interest, or with expectations that coupons will be paid, traders said.
Prices were, however, still at distressed levels, ranging from 11 to 15 cents to the dollar.
Country Garden’s share price ended down 1%, after having fallen as much as 5% earlier in the day. The Mainland Properties Index and China’s CSI 300 Real Estate Index lost more than 2% each.
The interest payments for offshore bonds came after Country Garden on Friday won approval from onshore creditors to extend the maturity of a private bond worth 3.9 billion yuan ($536 million).
Country Garden has not missed a debt payment obligation, onshore or offshore. However, it flagged the risk of default should its financial performance continue to deteriorate after posting a record loss for the first half of the year.
The developer has about $162 million of offshore bond interest payments due during the rest of the year, showed data from researcher CreditSights.
Country Garden’s onshore debt extension deal “might have given a template” on how the firm will negotiate for new repayment plans with creditors both onshore and offshore, said Ting Meng, a senior credit strategist at ANZ.
“The three-year extension of maturity offered by Country Garden looks better than restructuring plans by most of the other troubled developers,” Meng said.
“But the key is whether the plan could roll out smoothly, which can only be achieved if China manages to turn around the downward spiral on its property market,” she added.
