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Chinese property developer Country Garden Holdings Co. has issued a warning that it may be on the brink of its first-ever default and debt restructuring. This serves as a stark indication that despite government efforts to rescue the property market, the crisis in China's real estate sector continues to worsen.
In a stock exchange filing, the former top builder in China stated that it might not be able to meet its future offshore payment obligations, including dollar bonds. Such a non-payment could trigger creditors to demand accelerated repayment or take legal actions. Country Garden had previously managed to avoid its first public bond payment failure and successfully rescheduled local debt, which had temporarily shifted investors' focus from imminent delinquencies to a potential massive debt overhaul.
However, with its peer China Evergrande Group facing the risk of liquidation amid uncertainties about its own restructuring, Country Garden's financial woes highlight the urgent need for Beijing to implement stronger measures to support this key growth engine, especially as home sales continue to decline.
As a reflection of how Country Garden's debt troubles are impacting potential homebuyers' confidence in the developer, the company reported an 81% drop in contracted sales for September compared to the previous year. This decline has been accelerating over recent months, with a 72% drop in August following decreases of over 50% in June and July.
Country Garden's financial distress is significant due to its size and economic importance. It has more than 3,000 housing projects in smaller cities and employs approximately 70,000 people. Turmoil at the firm could have a more severe impact than the 2021 debt failure of distressed peer China Evergrande Group, given its much larger scale.
Country Garden is among the most heavily indebted property developers in the world, with total liabilities amounting to 1.36 trillion yuan ($187 billion). The trading range of its dollar bonds, ranging between 5 to 7 cents, indicates that bondholders expect minimal recovery in any potential restructuring.
In response to its financial challenges, Country Garden has engaged advisers, including Houlihan Lokey, China International Capital Corporation (CICC), and law firm Sidley Austin. These advisers will assess the company's capital structure and liquidity status.
The challenges faced by Country Garden are emblematic of the broader property debt crisis in China, and its fate will likely have significant implications for the nation's economy and the property market. The Chinese government has implemented various measures to boost confidence among homebuyers and support the property market, but the persistent challenges in the sector continue to pose a serious threat to the country's financial stability.
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