China’s Country Garden misses bond payments as turmoil grips property sector

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Country Garden, China’s biggest private developer by sales, has missed interest payments on two international bonds as it battles to stave off a liquidity crisis that has derailed the country’s real estate sector and dragged on economic growth.

The $500mn bonds, which are due in February 2026 and August 2030, and were already trading at distressed levels, fell to 13 and 11 cents on the dollar respectively on reports of $22.5mn in missed coupon payments.

Country Garden, which had almost $200bn in liabilities as of the end of 2022, was one of a handful of private companies to survive a liquidity crunch that has ravaged the country’s real estate sector since the default of Evergrande almost two years ago.

An official default would be a blow for an industry that typically drives more than a quarter of China’s total economic activity, but which has been paralysed by construction delays, declining home sales and a lack of funding. The world’s second-largest economy grew just 0.8 per cent in the second quarter compared to the first.

“Country Garden has been held out by many in China as being one of the better developers, and yet it’s suffered from the same problems everyone else has suffered from,” said Andrew Lawrence, Asia property analyst at TS Lombard.

“I think this will resonate perhaps more domestically than Evergrande [did],” he added.

Country Garden confirmed it had not yet made the payments and said in a statement on Tuesday that it was experiencing “liquidity pressures” because of “a deterioration in sales and the refinancing environment”, as well as tight rules on the use of funds. 

It said it was still trying to “actively optimise” its debt arrangements and “protect the rights of creditors”. The bonds have 30-day grace periods.

Evergrande, the world’s most indebted developer, originally missed coupons on its own international bonds in September 2021, sparking a wave of defaults across China’s vast property sector at a time when Beijing was on a regulatory push to reduce leverage.

The group, which is locked in an opaque restructuring process with international creditors, last month disclosed $81bn of losses in 2021 and 2022.

Country Garden was included in a government list of “high quality” developers eligible for funding support from state-owned banks in November. But it has come under intense scrutiny this year over its declining sales, which in July 2023 were less than half their level during the same period last year and a quarter of the comparable period in 2021. Its shares in Hong Kong are down 28.5 per cent this month.

Last week, it cancelled a $300mn share placement offered at a discount of 17.7 per cent at the last minute, according to a document produced by sole bookrunner JPMorgan.

The US bank had lined up potential investors and published terms of the sale before Country Garden pulled out on the evening of the planned deal, people with knowledge of the matter said.

In 2021, Beijing originally sought to reduce leverage across the sector through its so-called three red lines policy, which weakened companies’ ability to access new funding.

China’s central bank held a meeting with eight private enterprises and banks last Thursday, including three developers Longfor, Midea and CIFI, but Country Garden was not invited.

Pan Gongsheng, governor of the People’s Bank of China, asked lending institutions to offer efficient and reliable financial services to meet the funding demand of those private groups.

Additional reporting by Andy Lin in Hong Kong