Beleaguered Country Garden gets some temporary relief from domestic creditors 

Some of the struggling developer’s Chinese creditors recently agreed to roll over their maturing obligations, as the company races to restructure its foreign debt

Key Takeaways:

• Country Garden’s sales continued to deteriorate in the first quarter, plunging 81% year-on-year
• Media reported the Malaysian government was considering allowing gambling in the company’s struggling local Forest City project, though the government denied the reports

By Lau Chi Hang

Ten years ago when his property development firm was thriving, Country Garden founder Yang Guoqiang ambitiously wrote a brief 12-line verse titled “The Country Garden of My Dreams,” describing how his company “creates a happy life for society.”

But such happiness seems like a distant memory now, with the debt-heavy company fighting off creditors both at home and abroad as sales plunge for its core property business.

Despite its former status as a leading player and model private company, Country Garden Holdings Co. Ltd. (2007.HK), has gotten caught up in a sagging domestic property market that has dealt it billions in losses as it sits on more than 100 billion yuan ($13.8 billion) in debt. Many of the mega-projects that were once its crown jewels are also stumbling. Take its Silver Beach in the city of Huizhou, for example, which is now derided by many as a “Rotten Beach.” And its Forest City project in Malaysia, now jokingly dubbed a “Forest Ghost Town.”

The company has made headlines as it scrambles to reorganize its foreign debt, but less talked-about are the domestic creditors also knocking on its door. Last year, some of those creditors, many of them state-owned entities that take their orders from the national and local governments, allowed Country Garden to extend eight or nine domestic bonds. More recently, portions of three bonds reportedly missed some of their principal and interest payments, but were given an extension to September after discussions with creditors.

Creditors keep coming

If true, the extensions are really just some temporary relief but are nowhere near helping to resolve Country Garden’s bigger problems. The company has yet to announce its full-year results for 2023, prompting the suspension of its Hong Kong-listed stock when it missed the required deadline. One of its creditors, Kingboard Holdings Ltd. (0148.HK), has also petitioned to have the company liquidated over HK$1.6 billion in debt that it’s owed. A hearing in that case will be held in Hong Kong’s High Court on May 17.

The company has yet to reach an agreement for restructuring its foreign debt, only saying last month that it was communicating with its creditors and their advisors. Some of the latest market talk is saying Country Garden will submit a preliminary restructuring plan to a group of bondholders sometime next month.

As it has yet to issue its financial results for last year, we can only judge the company’s finances using information from its interim report for the first six months of 2023. The company had 101.1 billion yuan ($14 billion) in cash at the end of June, plus about 29.45 billion yuan in restricted cash. 

In terms of debt, its interest-bearing liabilities, including bank borrowings, senior notes, convertible bonds and corporate bonds, totaled 257.9 billion yuan, with a net gearing ratio of 50.1%. While Country Garden seemed to have ample cash at that time, its situation probably deteriorated considerably in the second half of the year, reflected by its failure to repay a growing number of financial obligations.

Recent reports said the Malaysian government may allow gambling into Forest City, one of Country Garden’s largest overseas developments, to revive the struggling project. The government later denied the reports. But even gambling might not be enough to boost Forest City in the short term and resuscitate Country Garden, whose problems extend much wider than any single project.

Nosediving sales

Reviving property sales and policy support from Beijing are the only two silver bullets that might be able to tide Country Garden through its crisis. Property sales are the lifeblood of any real estate developer, but Country Garden’s plunged 81% in the first quarter of this year to just 13.5 billion yuan.

There’s little sign that things will improve within the year as cash-strapped developers roll out big discounts, further pressuring prices. As new properties continue to flood the market, many potential buyers worry that today’s bargains might look expensive next year if prices continue to fall. Many also worry that a growing number of developers may lack the money to deliver properties still under construction. 

Such cautious sentiment makes it unlikely the sector will start to rebound in a year or even two. Instead, the market will need to be cleared of inventory and developers will need to get back on more solid financial footing through debt restructuring before buyer sentiment will finally improve.

Policy support treats symptoms, but not the root cause

Will the government continue to lend a policy hand to developers? The answer is almost certainly yes, but only in limited ways. For example, the government is unlikely to assist in helping companies resolve their foreign debts, and will only help some ease their domestic debt, based on their individual situations. The government is most likely to provide such support to more responsible companies like Country Garden, for example, by asking its state-owned creditors like banks to extend their debt repayment periods and asking such banks to lend the companies money to ensure they can finish their projects.

But such measures can only buy the companies some time while they try to restructure their large overall debt. Over the longer term, no government policy will be able to solve these companies’ problems once and for all. The recent bankruptcy and reorganization of Shenzhen-listed Jinke Property Group (000656.SZ) may be the canary in the coalmine, signaling the beginning of the end for many smaller domestic developers.

Country Garden director Yang Huiyan promised at the end of last year that the company’s founder and his family would “sell everything to support the company and explore an effective path to resume normal operations as soon as possible.” Yang Huiyan and three other directors also proposed substantial cuts to their own salaries to 120,000 yuan per year. President Mo Bin took the biggest cut from his previous annual salary of 3 million yuan.

But frankly speaking, such cuts are only a drop in the bucket for a company with more than 100 billion yuan in debt. That hole will remain even if the founder’s family sells its assets to support the company. So, Yang Huiyan’s words and actions look like mostly a gesture rather than anything more substantive. The fate of the collapsing China Evergrande (3333.HK), now being liquidated in Hong Kong, could well be a good lesson for all Chinese real estate developers large and small, namely that no company is too big to fail in the current climate.

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