Business Essentials for Professionals


Chinese Real Estate Mogul Country Garden Perishes In New Upheaval In The Sector

Chinese Real Estate Mogul Country Garden Perishes In New Upheaval In The Sector
The crisis in China's real estate market intensified once again on Friday, capping a stressful week for the protracted sector with a significant decline in the shares and bonds of Country Garden, one of the largest developers in the nation.
The company's Hong Kong-listed shares fell more than 5% in response to news that it was moving to refinance a portion of a 2019 credit facility, while its bonds were left close to record lows reached late last year. The company has thousands of projects in almost 300 Chinese cities.
"That doesn't get them completely out of the woods," said one Country Garden bondholder, who declined to be identified, adding that the developer was facing a further batch of bonds payments in coming months.
A similar warning was given by Raymond Cheng, head of China research at CGS-CIMB Securities, who added that it was a part of the larger problem of the government's response to the crisis.
"If sales don't improve people will worry about the repayment ability for developers like Country Garden who have large exposure in smaller cities," Cheng said.
"Country Garden is a top developer in terms of sales. If it defaulted it would send a very bad signal to the market that the central government does not care (about) more developers going down and has no plan to bail out."
Another week has brought disturbing news about the Chinese real estate market. Home sales have been declining, and the government is taking steps to reduce the excessive borrowing that was accumulated during a ten-year building boom. This industry has been on a decreasing trend that intensified during the Covid epidemic.
Along with numerous significant rating downgrades, other well-known but indebted Chinese companies, such as Dalian Wanda Group and state-backed Sino-Ocean, have also experienced big sell-offs this week.
The sector is expected to face $12.8 billion in dollar-denominated bond repayments by the end of the year, according to analysts at ANZ, so the worst may not be over yet.
"New measures, while helpful, are no panacea for the sector’s woes. Other efforts are needed to boost buyers’ sentiment about the long-term trajectory of the property market," they added.
One of the largest market participants in China, Country Garden, which declined to comment on Friday's selloff, is adding to the pressure on Beijing to provide the property sector, which once made up about a quarter of China's economic output, more support.
The loan refinancing for Country Garden was described as "marginally credit positive" by JPMorgan's analysts since a significant portion of the outstanding balance was being rolled into a new 30-month term rather than being subject to immediate repayment.
"That said, the onshore operating environment remains challenging for the developers, especially with no indication of relaxation of escrow account supervision," they said.
Investors have also been alarmed by this week's other major issues in the sector, including those at Dalian Wanda Group, Sino-Ocean, another prominent conglomerate in China, and Greenland's second default in less than a year.
Wang Jianlin, the former richest man in China, owns Wanda, which has a $400 million bond payment due on Monday to its primary property unit, Dalian Wanda Commercial Management (DWCM). Moody's and S&P Global, two rating organisations, are unsure if it will succeed.
One of the few private companies, Wanda, was able to survive the recent real estate catastrophe. Even earlier this year, DWCM was successful in selling bonds, which was viewed as a positive development for the industry.
Country Garden's bonds dropped to between 17 and 21 cents on the dollar on Friday as a result of the selloff, or roughly one-fifth of their face value. Each of its onshore bonds fell by about 30%.
"Country Garden is in great difficulties," said Yao Yu, founder of credit analysis firm Ratingdog, adding that it had more than 10 billion yuan ($1.4 billion) of debt due in the next two months.
Bonds issued by Wanda Commercial, which have lost over 70% of their value this year, also declined, and now only have about 25% of their initial face value.
JPMorgan calculates that a total of $120 billion in Chinese property debt has defaulted since the crisis started to take off in 2020.
Analysts at the bank predict that this year will see another $9 billion in defaults. Country Garden, which has debts totaling over $40 billion, is not included in this, despite the fact that economists predict the government will need to continue supporting the industry.

Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc