Four years after Chinese property giant Country Garden (2007. HK) launched an A$2 billion ($1.27 billion) development of 3,600 homes an hour’s drive southwest of Sydney, the outer suburban site remains a sparse field with fewer than 50 houses under construction. The “masterplanned community” of Wilton Greens that promised buyers shady, tree-lined streets, sporting fields, bike paths, parks, and a new local school is one of a string of stalled overseas developments the cash-strapped Chinese developer is now mainly seeking to offload as it struggles to pay creditors.
The problems of Country Garden, once China’s most prominent private real estate developer, remind us of the risks that high-flying property firms can take when they use high-leveraging strategies to boost sales. Country Garden, whose debt pile has been compared to Evergrande’s, recorded 668 billion yuan in contract liabilities as of the end of last year.
Its woes have been exacerbated by a slowdown in China’s real estate sector, with consumers pulling back from big-ticket purchases as higher interest rates and a weakening economy sapped their wealth. This setback has been for Country Garden, which is heavily exposed to China’s second and third-tier cities, where the property market has been fragile.
A senior analyst at Yicai Global says that even though the company managed to meet this month’s bond repayment, it would be easier for Country Garden to keep up with other debt payments with some form of debt restructuring or financial assistance from its creditors. “If the company can’t settle its foreign debts, its credit rating will continue to suffer, causing more investors to flee from the stock,” he said in a note late Tuesday.
While it may be impossible for Country Garden to avoid defaulting on some of its foreign debts, the company could try to buy time by negotiating with homebuyers who have skin in the game. It could abandon some unfinished, unsold projects and offer those buyers a chance to choose a more desirable location or refund their deposits — with a penalty — the analysts said.
Creditors are unlikely to approve any such plans, however. This week, the company won a last-minute extension to extend a 3.9 billion yuan ($537 million) bond, stretching payments into 2026. But it will face the same challenging task next month when a more significant bond and two more sizable yuan notes come due. If those bonds are not extended, creditors can present a winding-up petition to force the company into bankruptcy proceedings. A default would have far-reaching ramifications for the country’s sprawling real estate industry and millions of homeowners. It will also likely hurt consumer confidence and send negative market sentiment to non-state-owned developers such as Hong Kong’s Longfor Properties. “We believe the property market in China will suffer in the short term,” the Yicai analysts said. “Overall homebuyer sentiment will be hit by the negative news flow surrounding this issue.” — By Marc Stewart.
