Some Country Garden Bondholders Seek Default on Yuan Note

A group of Country Garden Holdings Co. creditors is seeking to declare a default on a yuan bond, adding a fresh complication for the distressed Chinese developer whose liquidity crisis has shaken the nation’s financial markets.

(Bloomberg) — A group of Country Garden Holdings Co. creditors is seeking to declare a default on a yuan bond, adding a fresh complication for the distressed Chinese developer whose liquidity crisis has shaken the nation’s financial markets.

Investors who say they collectively hold 10.5% of a yuan bond effectively due Sept. 4 have proposed the note be declared in default because of a recent downgrade, according to a filing to the Shanghai Stock Exchange’s private disclosure platform that was seen by Bloomberg News. While the investors weren’t identified, holders of that same amount had previously demanded full repayment of the security by its maturity.   

The development adds uncertainty to a crucial vote for Country Garden, which posted a record first-half loss of almost $7 billion Wednesday and warned of a possible default. Moody’s Investors Service downgraded the embattled developer three notches Thursday to Ca, piling on more pressure.

“The rating downgrades with negative outlook reflect Country Garden’s tight liquidity and heightened default risk, as well as the likely weak recovery prospects for the company’s bondholders,” Moody’s said. 

China is now taking further steps to halt the property freefall that’s battered Country Garden and other developers.  China’s financial regulators cut the down-payment requirements for first- and second-time home buyers late Thursday and lowered rates on existing mortgages to revive demand.

For Country Garden, the distress has deepened after it missed $22.5 million of dollar-bond coupons earlier this month, dragging the broader Chinese junk dollar debt market to its lowest levels this year. It must repay within a separate grace period that ends next week to avoid default.

Holders of the yuan bond can vote until 10 p.m. Beijing-time Thursday on the proposal to call default, as well as on Country Garden’s own request to stretch payment of the 3.9 billion yuan ($535 million) of outstanding principal into 2026. Each proposal being voted on requires support from creditors holding at least 50% of principal to pass. The noteholders are also voting on a company proposal to add a 40-day grace period.

Country Garden didn’t immediately offer a comment when reached Thursday.

Helmed by one of China’s richest women, Yang Huiyan, the builder’s importance to the broader economy stems from its sheer size. It had the equivalent of $187 billion of total liabilities as of June 30, with more than 3,000 housing projects in smaller cities and about 70,000 employees.

That status had given Country Garden the firepower to withstand an industry cash crunch that led to record defaults since China Evergrande Group first missed bond payments in 2021. But an industry slump is threatening that streak. Any stumble by Country Garden, now China’s sixth-largest builder by contracted sales, risks worse fallout than from Evergrande given it has quadruple the property projects.

Country Garden in recent days has disclosed a planned asset sale and the issuance of $34 million of stock to pay off money it owes.

Voting on the company’s bond proposals was initially slated to end on Aug. 25, but Country Garden extended it just hours before the deadline. 

China’s private-sector developers like Country Garden are grappling with an unprecedented crisis, after a government effort to curtail debt-fueled growth and housing speculation led to cash crunches. Officials have attempted myriad efforts to stoke demand for the property market — which along with related industries accounts for about 20% of the economy.

Country Garden’s troubles have intensified the past few months as it stares down as much as $2.9 billion of note obligations the rest of this year. Meanwhile, attributable sales through July fell 35%. 

Moody’s outlook on the developer remains negative, as it estimates that the company doesn’t have sufficient internal cash sources to address its upcoming offshore bond maturity, given its weakening sales and sizable maturing debt over the next 12 to 18 months, it said in a statement. Country Garden’s long-term corporate family rating was downgraded by Moody’s to Ca from Caa1.

It said in an exchange filing Wednesday that if financial performance continues to deteriorate, the group might not be able to meet its debt obligations, “which may result in default.” Country Garden also said there are “material uncertainties which may cast significant doubt on the group’s ability to continue as a going concern.” 

–With assistance from Emma Dong and Xinyi Luo.

(Updates with Moody’s downgrade from third paragraph)

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