Country Garden misses bond payment, says guarantor would step in

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Chinese developer Country Garden Holdings Co. said it cannot meet initial deadlines for interest payments on two local bonds and that a state guarantor would step in — marking the first test of a key government program to shore up builder debt.

The company’s onshore unit cannot make the coupon payments on its 3.95% note and its 3.8% bond by an initial deadline of May 9, according to filings. Both securities are guaranteed by China Bond Insurance Co., a state-owned firm at the heart of a program introduced by authorities in 2022 to help private-sector developers avoid liquidity crunches.

Country Garden said it will make every effort to fully repay the interest—which totals just 65.95 million yuan ($9.1 million)—within three working days. If payments aren’t made within that period, then China Bond Insurance would “fulfill its credit-enhancement responsibilities,” the statements said, without elaborating.

The development raises broader questions of whether other distressed developers struggling amid China’s unprecedented property crisis will also go on to miss payments, forcing the guarantor to wade in more ahead. So far at least 33 bonds have been issued under the program, with 33.7 billion yuan raised in total, according to data compiled by Bloomberg. No others have missed payments yet.

“The pressure will first and foremost be given to issuers,” said Yang Hao, a fixed income analyst at Nanjing Securities Co. “If they can’t even make interest payments, they will definitely have difficulties repaying principal.”

Once China’s largest developer by sales, Country Garden itself recently dodged its first local default on yuan bonds, which weren’t guaranteed. But strains have mounted after it defaulted on dollar notes last year. The builder is fighting a liquidation petition filed by a creditor in a Hong Kong court, and the first hearing is scheduled for May 17.

Country Garden has been hit hard by the broader property crisis and now is saddled with 1.36 trillion yuan of total liabilities, according to its unaudited 2023 interim results.

As for the missed interest payments on the guaranteed bonds, there is a grace period of five business days, before any default could be called.

But China Bond Insurance needs to step in and make payments if the company doesn’t pay within three working days of the initial Thursday deadline, according to the bond prospectuses.

Investors have signaled they expect to get their money, whichever party ultimately pays. Prices on both bonds have been indicated above par recently and remained there Thursday.

Still, the bigger picture for Country Garden is bleak. Contracted sales slid 83% in April after similar tumbles in the previous two months.

Caution is still needed on the developer’s capability to repay its debts as contracted sales have shown no sign of recovery, according to Ting Meng, senior credit strategist at Australia & New Zealand Banking Group Ltd.

“It will be even harder for the developer to refinance now,” she said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow