Country Garden Woes Deepen as Yuan Bonds Halted, Shares Slide

A crisis at Country Garden Holdings Co., formerly China’s biggest developer, is deepening after units halted trading of local bonds and shares slid following a cut by Morgan Stanley.

(Bloomberg) — A crisis at Country Garden Holdings Co., formerly China’s biggest developer, is deepening after units halted trading of local bonds and shares slid following a cut by Morgan Stanley.

The developer, whose woes threaten even worse fallout than defaulted peer China Evergrande Group given it has four times as many projects, is suspending trading of 11 onshore notes issued by the company and subsidiaries, it said in a filing to the Hong Kong stock exchange Sunday. The firm’s shares fell as much as 17.4%, after closing below HK$1 for the first time ever last week. Its bonds have fallen deep into distress, indicated below 10 cents.

The worsening situation with Country Garden, helmed by one of China’s richest women, Yang Huiyan, is unnerving markets given its sheer size. It also underscores the challenges China faces in containing a property debt crisis that’s sparked record defaults, homebuyer protests and fresh concerns about trust firms with exposure to real estate projects. Despite being among the first firms selected last year for a program to help developers raise fresh financing via state guarantees on local bond sales, Country Garden has still stumbled.

“We see higher risk of contagion not only across the sector but also possible spillover to the wider economy,” JPMorgan Chase & Co. analysts including Soo Chong Lim wrote in a research note.

In a sign of the wider impact, Chinese dollar junk bonds—largely issued by developers—extended declines by 2 cents, after the index fell to the lowest level this year last week to about 66 cents. A Bloomberg Intelligence gauge of builders declined as much as 4.1%.

Country Garden has yet to default on public bonds, but the clock is ticking on a 30-day grace period after it missed coupon payments due Aug. 7 on two dollar notes. 

The stakes are immense. The builder of more than 3,000 housing projects in smaller cities is a household name and employed about 70,000 people at the end of last year. 

It had 1.4 trillion yuan ($199 billion) of total liabilities at the end of last year. To put that figure in perspective, it exceeds the annual economic output of a long list of countries including Kuwait. The wider pain in China’s property market, where sales have started to fall anew, is making it harder to manage that mountain of debt. 

Country Garden said last week it would report a net loss of 45 billion to 55 billion yuan in the first half of this year, compared with earnings of 1.91 billion yuan in the same period of 2022.

The builder is considering extending some soon-to-mature securities, and representatives of bank China International Capital Corp. told some noteholders that its bond-underwriting team has been engaged to explore options for yuan-note maturities, people familiar with the matter said last week.

Country Garden’s credit stress “is likely to spill over to the country’s property and financial markets,” Moody’s Investors Services analysts including Kai Yin Tsang wrote in a research note. “Specifically, it is likely to further weaken market sentiment and delay the recovery of China’s property sector.”

In a separate statement Saturday, the company said it’s planning to hold meetings with bondholders on the repayment arrangements in the near future. It reiterated it will take measures to defuse risks and protect the legitimate rights of its investors while ensuring home deliveries.

“Considering its large exposure in low-tier cities, we believe it could take years for Country Garden to recover from its liquidity challenges,” Morgan Stanley analysts including Stephen Cheung wrote in a note, as they cut the price target on the shares.

Country Garden apologized Friday, vowing the firm will take more powerful and effective measures to ensure home delivery and to address periodic liquidity stress, Chairwoman Yang Huiyan and President Mo Bin say in a WeChat statement to investors and clients.

In the bond suspension notice, the company said it will “consider adopting various debt management measures” to safeguard its long-term development in the future.

Here’s a calendar of Country Garden’s upcoming bond principal and interest payments across currencies through September:

–With assistance from John Cheng.

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