Country Garden, Evergrande Set Up Two Tense Weeks for Creditors

Default and liquidation are looming in a matter of days for two companies central to China’s property debt crisis.

(Bloomberg) — Default and liquidation are looming in a matter of days for two companies central to China’s property debt crisis.

Country Garden Holdings Co., China’s former top developer, would suffer its first-ever public dollar bond default if it misses an interest-payment deadline that ends on Wednesday the latest. China Evergrande Group, another embattled real estate giant, faces the once-unthinkable possibility of asset liquidation on Oct. 30 when a key court hearing takes place.  

Whatever the outcomes, the events are set to mark fresh milestones in the years-long turmoil of China’s housing sector, where record delinquencies have cost investors steep losses and still pose a threat to financial stability. The industry’s rising stress is another reminder of the need for Beijing to adopt stronger measures to revitalize home sales and ease distressed firms’ cash woes.

“The events are critical for market sentiment, although the worst-case scenarios have already been priced in and are within expectations, as it is less likely that distressed developers will be able to turn things around,” said Chuanyi Zhou, analyst at Columbia Threadneedle Investments. “Restoring confidence will have to start in the physical market, with home buyers, which will need more time and easing policies to materialize.”

Country Garden, which is currently at the center of China’s property crisis, must pay $15.4 million coupon on a dollar bond by the end of a 30-day grace period Oct. 17-18 or a default can be called. The company hasn’t clarified which day marks the official end of the grace period, given the initial missed deadline of Sept. 17 fell on a Sunday.

Two holders of the dollar note due 2025 said they had yet to receive the interest as of 12:00 p.m. Hong Kong-time on Tuesday.

The looming obligation marks the first major test for Country Garden after it warned last week that it won’t be able to meet all of its future offshore payment obligations. The company has $9.9 billion of dollar notes outstanding, which would make it one of China’s biggest ever debt workouts. 

An eventual default wouldn’t come as a surprise, given the developer’s dollar bonds are trading at deeply distressed levels of around 4-6 cents on the dollar, indicating low expectations for debt recovery.

Potential delinquencies or a messy restructuring by Country Garden threaten to send China’s housing sector into deeper turmoil, as it has several times the number of projects run by Evergrande, whose default two years ago sent shock waves across Chinese markets. 

As for Evergrande, its destiny now hinges on an Oct. 30 Hong Kong court hearing on a creditor’s petition to liquidate its assets. A ruling in favor of that request would wreak havoc on the struggling company that’s trying to finalize a restructuring plan to pay back creditors. 

Any efforts to wind up the world’s most indebted developer — even if difficult to enforce in mainland China — would provide a roadmap for other builders and creditors on how a liquidation of such magnitude may play out.

With about $327 billion of liabilities, Evergrande has sunk into deeper trouble in recent weeks after it canceled key creditor meetings, threw its debt overhaul plan into doubt and failed to meet regulatory qualifications to issue new bonds. Adding an unexpected twist to the drama was a probe by Chinese authorities into the company’s founder Hui Ka Yan’s suspected crimes.

“Given markets’ pessimism, the avoidance of a large default or messy liquidation could still help stabilize China property sentiment in the short term,” said Chang Wei Liang, a strategist at DBS Bank in Singapore. “Longer-term uncertainties over real estate have proved harder to dissipate though. Spread compression could be restrained amid still dour property sales.”

–With assistance from Vrishti Beniwal.

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