Country Garden Narrowly Avoids Default By Paying Dollar Bond Interest Within Grace Period

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Chinese property developer Country Garden has managed to narrowly avoid defaulting on its dollar-denominated bonds by making overdue payments on Tuesday, offering a temporary reprieve to the debt-stricken company that recently spooked markets with its deteriorating financial health.

The company made interest payments of $22.5 million within a grace period that was set to end on September 5, according to a person with knowledge of the matter. Last month, Country Garden sent shockwaves through China’s already battered property market by revealing that its interest payments hadn’t been paid on their initial due date of August 6. The company has a 30-day grace period before its missed coupon payments constitute a default.

A Country Garden spokesperson didn’t immediately respond to a request for comment. Once considered as a high-quality developer with better access to funding, the Foshan-based company hasn’t been spared from the slump in the country’s real estate market. Just last week, Country Garden said it had registered a record loss of $6.7 billion in the first half of 2023, and warned of potential defaults in the future if its financial health continues to worsen.

“It has only managed to avoid defaulting for this time,” says Shen Meng, managing director of Beijing-based boutique investment bank Chanson & Co. “Country Garden still faces liquidity pressure and its debt risks still exist.”

The company had developed a reputation for building residential complexes outside major urban centers. Roughly two-thirds of its projects by value are located in lower-tier cities, where slumping property prices are depressing the company’s margins and failing to generate enough sales to help pay down its almost $190 billion in total liabilities.

Warut Promboon, a Hong Kong-based managing partner at research firm Bondcritic, says there is a chance the government might come to Country Garden’s rescue. The real estate downturn has become a drag on China’s post-Covid economic recovery, prompting officials to roll out more measures to shore up the market.

Just last week, authorities allowed the country’s largest cities to reduce the minimum down payment requirements and loosen certain purchase restrictions. The moves, which helped to spur home sales over the weekend, also led the Hong Kong-listed Country Garden to rally almost 15% the next trading day.

“At the end of the day, we believe the government has the interest to keep country garden afloat but bonds may not be paid in full,” Promboon says. “We see Country garden as the case of muddling through where investors will still get hurt going forward.”

Still, the stock is still down more than 60% so far this year. Country Garden’s Chairwoman Yang Huiyan, who derives the majority of her wealth from her stake in the company, currently has a net worth of $4.6 billion—marking an 85% plunge from her peak in 2021.

The 41-year-old mogul has recently been able to negotiate for more time to repay Country Garden’s debts. On Monday, the company secured enough votes from creditors to extend the maturity of $540 million in outstanding principal for a privately traded onshore bond for another three years. Overall, the company has $2.3 billion of onshore bonds and $1.9 billion of offshore bonds becoming due or puttable through 2024, according to Moody’s Investors Service. Citing reasons including tight liquidity and heightened default risks, the agency downgraded Country Garden further into junk territory.

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