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HomepropertyCountry Garden avoids default again in relief for China property sector

Country Garden avoids default again in relief for China property sector

HONG KONG – Country Garden Holdings made interest payments on US dollar bonds hours ahead of a grace period deadline, a person close to the firm said, pulling from the brink of default for the second time in four days and bringing relief to a crisis-hit property sector.

China’s largest private property developer had failed to pay coupons on the bonds totalling US$22.5 million (S$30.5 million) due on Aug 6, exacerbating fear of the developer’s cash situation and keeping markets on tenterhooks throughout their 30-day grace periods.

Although the amount was relatively modest, failure to pay would have undermined fragile hope in financial markets that China’s steady drip feed of policy stimulus was starting to stabilise the struggling property market and wider economy.

It would also have raised the risk of default and demands by holders of other dollar bonds to accelerate payments, bond holders and lawyers said, while heightening concern of spillover risk in the world’s second-largest economy.

Country Garden on Tuesday also offered to extend repayment of eight onshore bonds worth 10.8 billion yuan (S$2.05 billion) by three years, according to people with knowledge of the matter and documents seen by Reuters.

Those bonds, issued by Country Garden and a subsidiary, were set to mature and be puttable in 2023 and 2024, documents sent to onshore bond holders showed.

“Country Garden is trying hard to fulfil debt obligations, but whether this can continue will depend on the effectiveness of this round of stimulus and regulatory relaxation,” said Natixis Asia-Pacific senior economist Gary Ng.

Latest government stimulus measures over the last few days included lowering existing mortgage rates and preferential loans for first-home purchases in big cities.

Mr Ng said the latest stimulus should help stabilise the home market and consumer confidence, allowing developers to de-leverage less painfully, although more is needed to reverse a decline in income growth in a slowing economy.

Stuttering economy

Country Garden’s cash squeeze highlights the fragile state of China’s real estate sector, which accounts for roughly a quarter of the economy and whose situation has deteriorated since a government campaign against high leverage began in 2021.

Making matters worse is a lacklustre post-pandemic economic recovery.

Services activity expanded at its slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the economy and stimulus measures failed to meaningfully revive consumption.

“With domestic demand weak and house prices on the slide in smaller Chinese cities in particular, there are still worries about the fragility of the real estate sector,” said Ms Susannah Streeter, head of money and markets at Hargreaves Lansdown in Britain.

“Stimulus efforts to increase mortgage lending are welcome but a much larger package of support is likely to be needed to restore more confidence in the sector and put exposed property firms on a firmer footing.”

Maturity extension

Some of Country Garden’s dollar bonds added two points to their prices after news of Tuesday’s payments – a sign the bonds were trading with accrued interest, or with expectations that coupons will be paid, traders said.

Prices were, however, still at distressed levels, ranging from 11 cents to 15 cents against the United States dollar.

Country Garden’s share price was down about 1 per cent, paring some of its losses from earlier in the day. The Hang Seng Mainland Properties Index and China’s CSI 300 Real Estate Index lost more than 2 per cent each.

The interest payments for offshore bonds came after Country Garden on Friday won approval from onshore creditors to extend the maturity of a private bond worth 3.9 billion yuan.

Country Garden has not missed a debt payment obligation, onshore or offshore. However, it flagged the risk of default should its financial performance continue to deteriorate after posting a record loss for the first half of 2023.

The developer has about US$162 million of offshore bond interest payments due during the rest of the year, data from researcher CreditSights showed. REUTERS

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