Over-indebted Chinese developer Country Garden faces payment default

Overindebted Country Garden, one of China's largest real estate groups, announced Tuesday that it may not be able to repay all its loans, increasing the risk of default. The developer, who has long been deemed financially solid, has been caught up in recent months by the real estate crisis in China, which now threatens the survival of many players in the sector. Its failure to pay would be catastrophic for this key sector of the Chinese economy, which has long represented a quarter of its gross domestic product.

Country Garden, which was already formally at risk of default in September, finally repaid $22.5 million in interest on loans at the last minute during a 30-day grace period. The group then negotiated with creditors the rescheduling of several repayments. But new deadlines are looming in the coming weeks. Country Garden had to pay another reimbursement on Monday. The company “did not make” the payment of 470 million Hong Kong dollars (56.7 million euros), she said on Tuesday. However, the group theoretically has a grace period to avoid a potential payment default.

But Country Garden specifies that it “expects not to be able to honor all the repayments of its bond loans with foreign investors”. “Such a failure” may lead the creditors concerned to demand “acceleration” of the repayments owed to them or to launch legal proceedings, warns Country Garden. The group asks them for “patience” and indicates “assess the current difficulties” of the company.

Country Garden says it has engaged financial advisors “to evaluate the capital structure and liquidity” of its subsidiaries. “The company intends to continue to cooperate and dialogue with all creditors in order to reach a realistic solution as quickly as possible,” according to the press release.

Country Garden was still the biggest developer in China last year. Any unpaid debt would send a shock wave through the markets and plunge a real estate sector already scalded by the health crisis and the economic slowdown in China further into the doldrums. Country Garden had a considerable debt estimated at 1,430 billion yuan (180 billion euros) at the end of 2022. At the end of June it had 147.9 billion yuan in cash (18.6 billion euros), a sum mainly intended to complete housing already paid for by the owners even before their construction.

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Country Garden “does not have sufficient sources of cash” to meet upcoming deadlines, estimated in September the rating agency Moody's, which then lowered the group's solidity rating by three notches. It is now “Ca”, synonymous with “in default, with some hope of recovery”. Real estate groups in China have long relied on this financing model. But their massive debt has been seen in recent years by those in power as a major risk for the country's economy and financial system. Beijing has thus gradually tightened their conditions of access to credit from 2020, which has dried up the sources of financing for groups already in debt. A wave of payment defaults followed, notably that of the Evergrande group, which undermined the confidence of potential buyers and had repercussions on the entire sector, against a backdrop of economic slowdown.

Country Garden has four times more construction sites than Evergrande, whose default in 2021 led to demonstrations by buyers, some of whom then refused to repay their monthly payments. On Tuesday, he assured that his “operational priority (...) is to ensure the delivery” of housing, in a country where people generally pay for their housing before it is built. Any shutdown of construction sites risks social instability while China already has a number of unfinished housing developments. Another over-indebted Chinese developer, Kaisa, admitted on Tuesday during a court hearing in Hong Kong to being “insolvent in terms of liquidity”, after defaulting on its debt in 2021.