Here's how China's Country Garden can crawl out of its debt crisis

By Shuli Ren

Now that China is making a clear effort to rescue its housing market, Country Garden Holdings Co., once the nation’s biggest real estate developer by sales, might just manage to crawl out of its debt crisis. The question is how. 
 

It won’t be easy. Country Garden doesn’t benefit much from the government’s latest measures, at least not immediately. For instance, China is lowering the minimum down payment  for first and second homes to 20 per cent and 30 per cent, respectively. But only 22 major cities, including Beijing where the current requirements are 35 per cent and 60 per cent, have room to reduce them. Country Garden’s land bank exposure to these areas is only 13 per cent, HSBC Holdings Plc estimates. Its stronghold is smaller cities, not metropolises like Shanghai and Shenzhen. 

However, a turnaround is possible, given Country Garden's robust operational track record. While similar in asset size, its liabilities are only at around 60 per cent those of China Evergrande Group, the world’s most indebted developer. 

Here are a few things Country Garden can do. 

First, buy itself time. Stay current on coupon repayments and hope for the best. Country Garden has about $10 billion dollar bonds outstanding, but the earliest maturity is not until 2024. To avert a default, the developer needs to repay $22.5 million in two coupons this week.

It does have more than $1 billion worth of yuan bonds maturing this year. As such, management needs to spend time with investors, convince them that it can survive, and somehow obtain debt extensions. 

The company is already taking this approach. It has won a last-minute approval from creditors to extend a 3.9 billion yuan ($537 million) bond, stretching payments into 2026. This note, originally due on Sept. 2, was one of the biggest hurdles this year. Beyond this month, Country Garden has two more sizable yuan notes maturing in 2023: one in late November and another in early December. 

Not all creditors are on board with debt extensions, however. Some have been pushing for defaults. Going forward, the developer has to work harder and create a positive narrative. 

Second, with over 3,000 projects nationwide, Country Garden’s Achilles’ heel is delivering homes that have already been sold. As of the end of 2022, among its roughly $200 billion of debt, close to half were contract liabilities, or pre-sales deposits it received from homebuyers. The rest was split roughly between account payables, including commercial acceptance bills and interest-bearing debt. Once the pre-sales problem is resolved, the debt pile doesn’t look particularly large, especially compared to Evergrande, where about one-quarter of liabilities is in interest-bearing debt. 

Construction costs are by far the biggest expense that Country Garden incurs — an estimated 160 billion yuan this year, according to JPMorgan Chase & Co. Based on the company’s own stress test conducted a year ago, it needs about 28 billion yuan to 30 billion yuan in monthly sales just to generate enough cash to be able to finish pre-sold projects. It has not hit this important threshold so far in 2023. In other words, it has been bleeding cash delivering pre-sold homes. 

Does it still make business sense to finish projects in cities plagued by population outflow and oversupply? Country Garden has a formidable sales operation. Last year, it had a respectable 65 per cent sell-through rate (new homes sold as a percentage of units being offered),  despite the property downturn. Nonetheless, not every apartment in a new project gets bought — and some may not be for a long time to come. As of the end of 2022, unsold units under construction account for about 10 per cent of Country Garden’s land bank. 

Of course, the developer must deliver pre-sold homes — the alternative would not be politically viable. However, just like with its creditors, it should negotiate with homebuyers, too. What about abandoning some sites and giving buyers nicer, finished apartments in a better part of town? Or returning deposits — plus a penalty — to those who bought from projects with dismal sales?

To survive, one thing is for certain: The developer has to scale back. It needs to buy time, while negotiating with all players with skin in the game. Unsold, undeveloped projects must be offloaded to asset managers, while some sold, unfinished homes need to be scrapped without angering consumers. It will be a true test of Country Garden’s operational strength. 

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper