Country Garden Warns Of Default Risks As It Posts Record Loss Of $6.7 Billion

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Chinese property developer Country Garden reported a loss of 48.9 billion yuan ($6.7 billion) for the first half of 2023, and warned of default risks down the road if its financial performance continues to deteriorate.

The Foshan-based developer said it felt “deeply remorseful for the unsatisfactory performance” in its interim results published late Wednesday evening. It also said that “material uncertainties…may cast significant doubt on the group’s ability to continue as a going concern.”

With almost $190 billion in total debt, the company’s bleak assessment comes as no surprise to investors. The Hong Kong-listed company had warned earlier that it was facing up to $7.6 billion in estimated losses for the first six months of the year, and its latest results show that its cash holdings have been decreasing due to declining sales and weak refinancing conditions.

And in the Wednesday filing, Country Garden warned that if its financial performance continues to worsen, the group might not be able to fulfill the financial covenants of certain borrowings, and this “may result in default in these borrowings and cross-default in certain other borrowings,” it wrote in the filing.

Country Garden’s precarious finances highlight the mounting crisis in China’s property sector. Although it had once been regarded as a high-quality developer with little chance of defaulting, the company caught many off guard when it revealed earlier this month that it hadn’t paid $22.5 million in interests payments on some of its dollar bonds.

The developer had $13.9 billion in cash and cash equivalents as of June 30, which is not enough to cover almost $15 billion in interest-bearing debt, such as bonds and convertible bonds due within the next 12 months, according to the results.

“Although the company had already anticipated the market adjustment in the industry cycle, the profundity and persistence of the market’s downtrend still caught the company off guard,” it wrote in the filing.

Now, the beleaguered developer is negotiating with debt holders to extend payment deadlines. It is seeking to add a 40-day grace period for an onshore bond with $535.5 million in outstanding principal due September 2, while reiterating that the missed $22.5 million in interest payments on two U.S. dollar bonds were still within their grace periods when it published the interim results.

But Jeff Zhang, a Hong Kong-based analyst at research firm Morningstar, said in an August 31 note that default risk “remains elevated. ”

“While the company is focused on averting default, we think the lack of cash flow details has added to the murkiness of CGH [Country Garden Holdings]’s debt servicing capability,” Zhang wrote in the note. “Moreover, we foresee that subdued homebuyers’ confidence in CGH will be the main overhang on sales in the future, further affecting the firm’s ongoing cash flow.”

Country Garden’s stock and bond prices have plunged across the board. The company’s chairwoman Yang Huiyan, who derives the majority of her wealth from her stake in Country Garden, has seen her net worth plunge 85% from its peak in 2021 to its current level of $4.4 billion.

The company is also negotiating with banks and other financial institutions to extend its deadlines for loans due within one year, while adjusting its sales strategies to better respond to market changes, according to its interim results filing. About two-thirds of Country Garden’s residential projects by value are located in townships and lower-tier cities, which has added further pressure to its financial performance because property prices outside the major metropolises haven’t been as resilient since the pandemic.

To bolster growth in the wider economy, Chinese authorities have taken steps to address the slumping property market, with the country’s largest banks preparing to cut interest rates on existing mortgages and deposits. Mortgage rules in two of the country’s biggest cities–namely Shenzhen and Guangzhou–have been loosened to reinvigorate homebuyer demand, although most economists don’t expect to see a massive stimulus package down the road because the leadership doesn’t want to add to already high debt levels in the financial system.

Country Garden, for its part, had previously stated that it had wanted to expand further into tier-1 and tier-2 cities. But its continued exposure to the lower-tier land sites means that contracted sales will underperform the market and drop to $28.8 billion in 2023 and $24.7 billion the year after, according to an August 4 research note from Moody’s Investors Service. The company reported $17.7 billion in contracted sales for the first half of this year, and said in its interim results that sluggish demand is still exerting downward pressure on its sales performance.

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