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In a significant development, Chinese developer Country Garden Holdings Co has been declared in default on a dollar bond for the first time, indicating its distress amid the ongoing property debt crisis in China, the world's second-largest economy. The failure to pay interest on the note within the grace period, which ended last week, has been deemed an event of default by trustee Citicorp International Ltd. This default puts Country Garden on the path towards one of China's biggest-ever restructurings.
This declaration means that the trustee must declare principal and interest due immediately if holders of at least 25% in aggregate principal amount of the outstanding notes demand it. So far, there is no indication that creditors have made such a demand.
Country Garden, one of the most indebted developers globally, missed the initial deadline of September 17 and didn't pay $15.4 millions of dollar bond interest within the 30-day grace period. The company had informed Bloomberg News that it didn't expect to meet all offshore payment obligations on time, making a default seemingly inevitable.
An astounding 81% drop in contracted sales for September underscores the depth of the challenges Country Garden faces. In what appears to be a prelude to a broader restructuring, the company recently hired advisers to review its capital structure. Its dollar notes have been indicated at around 5 cents, indicating how little money investors expect to recover, considering they were near 80 cents in June. The firm's shares have plummeted about 74% this year alone.
Led by one of China's wealthiest women, Yang Huiyan, Country Garden's size makes it crucial to the Chinese economy, where the property market and related industries constitute about 20% of the GDP. For several years, Country Garden was the largest builder in China by sales before falling to seventh place in 2003. Despite the decline, it still had over 3,000 housing projects in smaller cities and approximately 70,000 employees.
The impact of this turmoil could be more significant than the debt failure experienced in 2021 by its distressed peer, Evergrande Group, given that Country Garden has several times the number of projects.
The problems for the property market began in 2020 when authorities laid out “three red lines.” Those rules set leverage benchmarks builders had to meet if they wanted to borrow more money. Authorities have taken several steps in recent months as they try to fine tune policy, including a broad relaxation of down payment requirements and cuts to some mortgage rates. This default comes at a time when Chinese President Xi Jinping is intensifying support for the economy by issuing additional sovereign debt, raising the budget deficit ratio, and making an unprecedented visit to the central bank.
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 of principal.
This development underscores the challenges faced by China's property sector, highlighting the broader concerns in the global financial market. The situation with Country Garden serves as a reminder of the complexities in the real estate industry, impacting economies and investors alike. As the situation continues to unfold, it will be closely monitored by experts and stakeholders, given its potential implications on the global economic landscape.
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