China's Country Garden signals default, hires advisers as sales plunge

Country Garden, which has become a symbol of China's property debt crisis, said that it had not made a due payment in the amount of HK$470 million ($60 million) under certain of its indebtedness

By Alfred Liu and Felix Tam

Chinese developer Country Garden Holdings Co. ramped up warnings that it’s set for its first-ever default and hired advisers, the strongest indications yet the company is headed for a restructuring that would be one of the nation’s biggest.
 

The builder “expects that it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, including but not limited to those under the U.S. dollar notes issued by the company,” it said in a filing Tuesday. “Such non-payment may lead to relevant creditors of the Group demanding acceleration of payment of the relevant indebtedness owed to them or pursuing enforcement action.”

Country Garden, which has become a symbol of China’s broader property debt crisis, said that it had not made a due payment in the amount of HK$470 million ($60 million) “under certain of its indebtedness.” It has missed initial deadlines to pay interest on several bonds in recent weeks, with some grace periods ending later this month. The firm has $11 billion of offshore bonds outstanding, according to data compiled by Bloomberg. 

Once China’s largest developer, Country Garden has been engulfed in a broader property debt crisis and has warned in recent months that it may default. Fresh concerns about broader financial market contagion from China’s property sector flared in August when the firm missed paying interest on dollar bonds by an initial deadline. While it went on to meet those obligations within a grace period, it has since missed more initial deadlines and it had not commented publicly on its prospects for honoring those debts before Tuesday. 

In a sign that Country Garden’s debt woes are affecting prospective homebuyers’ confidence in the builder, its September sales plunged about 81% from a year earlier. The company said there hasn’t been any material industrywide improvement in property sales, despite efforts by authorities to shore up the market.

Distress runs deep at the company, which is one of the world’s most heavily indebted developers with 1.36 trillion yuan ($187 billion) of total liabilities. Its dollar bonds are indicated in a range of 5 to 7 cents, indicating how little holders expect to recover in any eventual restructuring. 

In a step that distressed companies often take as they gear up to seek broader restructuring of their debt, the developer also said it had hired advisors.  

The builder has engaged China International Capital Corporation Hong Kong Securities Ltd. and Houlihan Lokey (China) Ltd. as its joint financial advisers, and Sidley Austin as its legal adviser, “to evaluate the capital structure and liquidity of the Group and formulate a holistic solution,” it said in the filing Tuesday.

The announcement comes after people familiar with the matter said late last month that the developer was is in talks with Houlihan Lokey and CICC for both to become financial advisers and put together an offshore-debt restructuring plan.

Country Garden creditors have been in discussions with several financial advisers who are separately seeking to form an ad-hoc group ahead of a possible offshore-debt restructuring.

PJT Partners Inc. and Moelis & Co. have been talking with various creditors, people who said they were involved in the private conversations said earlier this week. No decisions have been made by creditors, the people added.