Country Garden Default Would Be Worse Than Evergrande, BI Says

A debt crisis that rivals China Evergrande Group’s default may be brewing in the world’s second-largest economy.

(Bloomberg) — A debt crisis that rivals China Evergrande Group’s default may be brewing in the world’s second-largest economy.

Some holders of Country Garden Holdings Co.’s notes have yet to receive coupon payments effectively due Monday, prompting Bloomberg Intelligence to warn that a default would be more serious than Evergrande’s collapse. Evergrande defaulted in late 2021 and its struggles have come to symbolize the long-running troubles of China’s ailing real estate sector. 

“Any default would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects,” BI analyst Kristy Hung wrote in a report Wednesday. “Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

Country Garden has 30 days to repay its coupons after payment effectively came due on Monday, according to the notes’ prospectuses. Holders of two different notes said they didn’t receive the coupons as of Tuesday afternoon, and the firm didn’t respond to questions about whether it had made the payments.

Investors are growing increasingly nervous even though Country Garden has a so-called grace period to remit payments as some of its peers used this to buy time before eventually slipping into default. The developer’s next bond to fall due dropped to 11 cents on Tuesday while an index tracking China’s junk dollar debt market is approaching the year’s low.

The prolonged slump in China’s property sector has brought previously sound companies to their knees, with the likes of Central China Real Estate Ltd., a state-backed developer, repeatedly using grace periods to buy time before stopping payments. In July, creditors of a unit of Dalian Wanda Group Co. and state-backed Sino-Ocean Group Holding received coupons at the last minute. 

Country Garden’s shares fell as much as 8.9% in Hong Kong on Wednesday to reach the lowest level since November 2022, and three brokers have downgraded the stock. A Bloomberg gauge of China’s real estate firms posted one of its largest drops this year on Tuesday, reflecting concerns about the fallout on the sector. 

“Developers may use the 30-day grace period for coupon given their tight liquidity situation and also for cost saving considering the high offshore interest rate environment,” said Iris Chen, a credit desk analyst at Nomura International HK Ltd. “It would not be a default practice as it is a bad signal that reflects tight liquidity, but distressed developers might not care that much as their bonds are already trading at low cash price.” 

(Updated with BI analysis in the first three paragraphs)

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