Country Garden Loan Deal, China Asset Support Moves Trigger Relief Rally

  • Country Garden shares rose 14.6%, helping China’s property stocks rally
  • The company has interest payments linked to the Malaysian bond
  • The grace period for two Country Garden offshore dollar bonds ends on Tuesday
  • Company to conduct restructuring negotiations for entire offshore debt-borrowers

HONG KONG/NEW YORK, Sept 4 (Reuters) – Country Garden’s ( 2007.HK ) deal with lenders for an extension to repay 3.9 billion yuan ($536 million) worth of offshore debt lifted the developer’s shares on Monday and weighed on China’s crisis. The property sector needs some rest.

Country Garden shares have risen 14.6% since Aug. 10, up 19%. Hong Kong’s Hang Seng Mainland Properties Index (.HSMPI) rose as much as 10%.

Global stocks also rose on Monday, partly lifted by hopes that China’s steady drip-feed of policy stimulus could stabilize the economy, which has seen its post-pandemic recovery falter rapidly as the property sector’s cash squeeze worsens.

But even as country garden investors breathe a sigh of relief, it remains to be seen whether the stimulus measures will help quickly revive property demand, ease the sector’s cash crunch and lift the gloom over the wider financial system.

Beijing on Monday approved the creation of a special bureau to promote growth and development of the private economy, adding to a series of policy moves in recent months to revive the world’s second-largest economy.

The private sector is responsible for 80% of new urban jobs, but has struggled to attract investment amid a weak economic recovery in the first half of the year, with business owners also constrained by weak domestic demand.

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Markets rallied after UBP’s senior economist for Asia, Carlos Casanova, said authorities were taking big steps in the past few days to support the property sector.

“While these are positive measures for sentiment to help stabilize real demand for housing, the sector is not completely out yet,” he said, adding that bond defaults by developers were “artificially low” as Beijing tried to mitigate. Credit risks in an orderly manner.

Country Garden’s dire financial woes further highlight the fragile state of the country’s real estate industry, which accounts for a quarter of the economy and whose debt situation remains dire from 2021.

Considered financially sound compared to peers, China’s top private developer has not missed an onshore or offshore debt obligation until it defaulted on coupon payments on dollar bonds last month after a slowdown in housing demand hurt its liquidity.

Country Garden later reported a first-half loss of 48.9 billion yuan, a record for the developer.

In the past few weeks, Chinese authorities have taken a number of measures, most notably lowering existing mortgage rates and preferential loans for first-home purchases in major cities.

“We will see in the coming months whether these supply-side measures can revive home-buying demand, which is critical to the fortunes of China’s developers and their ability to handle upcoming debt maturities,” said Tara Hariharan, managing director of Global Macro. Hedge fund NWI Management in New York.

He noted that Country Garden and other developers face significant maturities this year.

The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center on August 9, 2023 in Shanghai, China. REUTERS/Aly Song/File Photo Get license rights

Country Garden faces debts of 108.7 billion yuan within 12 months.

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In an agreement reached late Friday, the company will pay its obligations in installments over three years, a day before the developer is due to repay $536 million worth of debt.

Reform talks

Country Garden has wired interest payments tied to a 100 million Malaysian ringgit ($21.5 million) bond due Sept. 2, a source familiar with the matter said, in another sign the company is trying to meet payment deadlines and avoid default.

The source asked not to be named due to the sensitivity of the matter.

The developer also has another debt repayment challenge coming up — a grace period for missed coupon payments last month on two foreign-dollar bonds totaling $22.5 million ends on Tuesday.

Three of its offshore creditors said the extension agreement raised confidence that it could pay interest on those bonds because it was able to avoid offshore debt.

Bondholders declined to be named as they are not authorized to speak to the media.

After paying the interest by Tuesday, lenders expect Country Garden to enter into restructuring talks for its entire offshore debt to avoid a “hard default”, similar to what it did with offshore lenders.

Country Garden did not immediately respond to a request for comment.

While China’s property industry may have taken a bit of a break, some market participants said they plan to stay away from the sector until home sales rebound.

“We sold all our Chinese real estate holdings in April 2020 and have not bought anything back since,” said Qi Wang, CEO of Hong Kong-based Mega Trust Investment. “Now I won’t touch private developers with a ten-foot pole.”

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($1 = 4.6520 ringgit)

($1 = 7.2711 Chinese Yuan Renminbi)

Reporting by Xie Yu in Hong Kong, Carolina Mandel in New York and Joe Cash in Beijing; Written by Sumeet Chatterjee; Edited by Edvina Gibbs, Lincoln Feast and Muralikumar Anantharaman

Our Standards: Thomson Reuters Trust Principles.

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