MNI: Country Garden Bigger Blow Than Evergrande- Fund Managers

A new wave of debt problems hitting Chinese property developers has shaken the confidence of foreign investors in what they had assumed was an implicit guarantee for high-quality developers following the introduction of the government’s “three arrow” support plan in 2022, fund managers and lawyers told MNI.

Country Garden, previously China’s largest developer by sales, missed USD22.5m of coupon payments on Aug 6 and then suspended 11 onshore bonds, indicating last year’s “three-arrow” policy support aimed at easing access to credit, bond, and equity financing has not saved the sector’s supposed high quality developers from a liquidity crunch.

“The Country Garden default is more damaging to offshore China investor appetite than Evergrande was two years ago,” said a senior fixed-income investor based in Hong Kong, asking not to be named due to the sensitivity of the matter.

Policy advisors and local analysts recently told MNI the government will likely maintain an Evergrande style “zero-bailout” approach to resolving recent defaults, an approach investors say brings uncertainty. (See MNI: China Seen Boosting Property Market, Not Bailing Out Firms - Bonds & Currency News | Market News)

“Investors had traded assuming the strategy was to allow over-leveraged firms like Evergrande to default whilst ensuring policy support put a floor underneath the high quality developers, but now that floor seems to have gone, there’s huge uncertainty” the fixed-income investor added.

Risks that liquidity issues could impact more developers ahead were “inevitable” according to Kingsley Ong, partner and head of special situations in Asia at CMS Cameron McKenna, an international law firm. “The China property sector is going through one of its most stressful periods in decades, and no developer is immune,” he added.

In response to a question on the status of Country Garden last week, National Bureau of Statistics Spokesperson Fu Linghui said the government would implement “market adjustment mechanisms” to resolve developer risks, noting that recent conditions have exposed debt risks of some leading firms.

“Investors are surprised Country Garden’s situation has not triggered a stronger policy response to avoid a meltdown in confidence,” said Rajeev De Mello, global macro portfolio manager at GAMA Asset Management, adding that investors had not expected another Evergrande episode would be repeated so soon.

RESTRUCTURING

Country Garden’s creditors will now be monitoring Evergrande negotiations closely, as terms agreed with China’s most indebted developer are likely to form an industry-wide baseline going forward, said Rob Child, partner at law firm Ashurst in Singapore who specialises in cross-border restructuring.

First announced in March, Evergrande’s restructuring proposal allows creditors to exchange holdings into new notes with extended maturity or convert them into combinations of new notes with shorter maturities and equity-linked instruments.

“The wait and see approach will end once Evergrande is finalised,” Child said, adding that Evergrande’s next creditor hearing due at the end of this month could be the catalyst for a wave of implementation across the industry.

Country Garden has CNY17 billion of onshore bonds and about CNY14 billion of offshore bonds either due or puttable by the end of 2024, according to a recent note from Moody’s rating agency.