China’s giant property developer Country Garden has been declared in default on its debt after failing to make a bond repayment by a final deadline of October 18.
A panel of global banks and investors said Thursday that a “failure to pay” event had occurred on that date, laying the foundation for investors to receive payouts on credit default swaps (CDS).
A CDS is a derivative that allows an investor to swap their credit risk with that of another investor. It’s similar to an insurance product in that it can protect buyers against losses arising from debt default by a company or government.
The Credit Derivatives Determinations Committee, which oversee the CDS market, convened a meeting on Wednesday to discuss whether Country Garden’s missing bond payment would trigger CDS payouts.
Twelve members of the committee, including investment banks and hedge funds such as JP Morgan, Goldman Sachs and Citadel Americas, agreed that Country Garden was involved in a “failure to pay” event last week, according to a statement posted on Thursday.
Country Garden, formerly China’s largest homebuilder, missed the payment on a $500 million bond as it battles a liquidity crisis. The company had already warned investors that it could default on its offshore debt, after reporting a deepening plunge in its sales last month.
“Although this is no surprise given [Country Garden’s] expectation of not meeting offshore payment obligations within grace periods, we expect the formal default to further weigh on homebuyers’ confidence in Country Garden’s brand,” Jeff Zhang, an equity analyst at Morningstar, wrote in a research note.
The deepening crisis at Country Garden offers more evidence that China’s all-important property market is languishing in a deep downturn that poses a major threat to the country’s growth prospects. Analysts say it could take years to climb out of the slump because housing demand is waning as the population ages.
“Country Garden was once considered a safe name, even as peers like Evergrande and Sunac China went bankrupt around them. Its default shows there really aren’t any safe names in this sector left,” said John Bringardner, head of Debtwire, a New York-based provider of data and news on the fixed income market.
What’s next for Country Garden?
As of the end of June, Country Garden had around $15 billion worth of debt due within 12 months, according to the most recent information released by the company. Its total liabilities were around 1.36 trillion yuan ($190 billion).
After being officially declared a defaulter, the company is now fighting for its life. Its debts will need to be restructured and its creditors could present a winding-up petition against the company. It has already hired specialist restructuring advisers.
“With [Country Garden’s] liquidity subdued by the sales slump, the company’s survival hinges on bondholders’ acceptance of a proposed repayment schedule, in our view,” Zhang said.
Bringardner believes that Country Garden will follow in the footsteps of Sunac China, a developer that has managed to restructure its operations, rather than Evergrande, which continues to stumble through a painful, prolonged process that has seen its chairman detained, and could yet succumb to a messy collapse.
Sunac, which was China’s third largest homebuilder in 2021, is in the process of overhauling its liabilities after struggling to make payments.
In March, it unveiled a $9 billion restructuring plan after reaching agreements with a group of key bondholders. In early October, it won approval from a Hong Kong court for the plan, the first for a major Chinese developer that could provide a template for its industry peers.
