Chinese developer Country Garden default on dollar bond declared for the first time in trustee notice to bondholders
- Country Garden’s failure to pay interest on the note within a grace period ‘constitutes an event of default’ trustee Citicorp International tells bondholders in a notice
- The property developer did not pay US$15.4 million of dollar bond interest by the end of a 30-day grace period after missing the initial deadline of September 17
Chinese developer Country Garden Holdings was deemed to be in default on a dollar bond for the first time ever, underscoring its fall into distress amid a broader property debt crisis that has shaken the world’s second-biggest economy.
Country Garden’s failure to pay interest on the note within a grace period that ended last week “constitutes an event of default,” according to a notice to holders from trustee Citicorp International seen by Bloomberg News. That means the trustee must declare principal and interest due immediately if holders of at least 25 per cent in aggregate principal amount of the notes outstanding demand it. There is no indication that creditors have made any such demand yet.
The builder, among the world’s most indebted developers, did not pay US$15.4 million of dollar bond interest by the end of a 30-day grace period after missing the initial deadline of September 17. A default had appeared all but official after Country Garden told Bloomberg News last week that it did not expect to be able to meet all offshore payment obligations on time. The company is now likely headed for what would be one of the nation’s biggest-ever restructurings.
A spokesperson for Citigroup declined to comment about the trustee notice to Country Garden bondholders. The builder did not immediately offer a comment when reached Wednesday.
Helmed by one of China’s richest women, Yang Huiyan, the builder’s sheer size has made it important to the economy, where the property market along with related industries accounts for about 20 per cent of gross domestic product. The default comes just as Chinese President Xi Jinping steps up growth support, issuing more sovereign debt for infrastructure spending, raising the budget deficit ratio and even making an unprecedented visit to the central bank.
In what’s often a prelude to a broader restructuring, the company recently hired advisers to review its capital structure. Its dollar notes have been indicated around 5 cents, showing how little money investors expect to recover, after some were near 80 cents in June. Its shares have dropped about 74 per cent this year.
Country Garden debt crisis triggers push for payout on credit default swaps
The Citi declaration may be key for credit default swaps buyers. A panel of banks and investment managers was asked by market participants whether the missed payment triggered contracts tied to the developer, according to a notice posted Monday.
The Credit Derivatives Determinations Committees will meet on Wednesday at noon London time to discuss if a failure-to-pay credit event occurred.
It also has wider repercussion for Country Garden’s dollar bondholders who sought to organise themselves to negotiate a debt restructuring. Some creditors were already mulling forming groups.
The company was the country’s largest builder by contracted sales for several years before plunging to seventh so far in 2023. Despite that decline, it still recently had more than 3,000 housing projects in smaller cities and about 70,000 employees. For that reason, turmoil could lead to a worse impact than from the debt failure in 2021 at distressed peer China Evergrande Group given it has several times the number of projects.
Chinese authorities have been seeking to revive the real estate market after developers suffered record defaults as a debt crisis heads into its fourth year. The problems began in 2020 when authorities laid out “three red lines.” Those rules set leverage benchmarks for builders if they wanted to borrow more money.
Authorities have taken several steps in recent months to fine-tune policy, including a broad relaxation of down payment requirements for homes and cuts to some mortgage rates.
But that has not been enough to turn things around: Property investment contracted 9.1 per cent in the first nine months of the year, data last week showed.
Some prospective homebuyers have held back on purchases due to fears that builders might not be able to complete construction. Underscoring the depth of the problems, Country Garden recently said that its September contracted sales tumbled 81 per cent from a year earlier.
The firm has yet to officially default on any onshore bonds. It won noteholder approval in September to extend payments on nine onshore securities with a combined 14.7 billion yuan (US$2 billion) of principal.
