The good, the bad and the very ugly: Chinese giant faces collapse

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Country Garden, once China’s biggest real estate developer, is edging toward a default. The distressed builder suspended trading in nearly a dozen onshore bonds on Monday, paving the way for debt negotiations and a possible restructuring. Investment bank CICC International Capital has been engaged to explore options for the company, including extending some soon-to-mature yuan notes.

Billionaire Yang Huiyan held a 52.6 per cent stake in Country Garden as of the end of July. Turning around the company may be a bridge too far.

With about $US10 billion ($15.4 billion) dollar bonds outstanding, foreign investors, of course, want to know what this will mean for their holdings, such as the recovery rate and timing of a debt workout.

First, the good. Country Garden is not China Evergrande Group. That’s a much better-run company. It’s unlikely to have the kind of opaque web of off-balance sheet debt that Evergrande – or many other mainland developers – wove. Its financial reports are more credible. As of the 2022 year-end, Country Garden held 87 billion yuan ($18.4 billion) in unrestricted cash, excluding that in escrow accounts. That money will probably be used to deliver unfinished projects, rather than shifted to repay some hidden debt somewhere.

Now, the bad. In a restructuring scenario, investors are unlikely to see any money upfront. Exchanging their notes for payment-in-kind bonds – a feature distressed firms often use to preserve cash – is very much on the cards.

Country Garden’s Achilles’ heel is a heavy exposure to smaller cities, which are plagued by housing oversupply and population outflows. What doesn’t help either is that the government has shifted its easing policy to larger, more resilient cities, hardly benefiting the builder. Sales will take time to recover.

By the company’s own account, it needs about 28 billion yuan to 30 billion yuan in sales a month to generate enough cash and be able to finish presold projects. However, it hasn’t hit the break-even point this year, and the past few months have been even worse.

There is no doubt that Country Garden is going through a liquidity crisis. Investors will have to be patient and accept that there are no payouts in the immediate future.

Now here comes the outright ugly. It’s possible that Country Garden’s dollar bonds will be in default for a long time and there’s no restructuring whatsoever.

A company will propose debt workouts only if its shareholders still see value and want to turn the page. But does billionaire businesswoman Yang Huiyan, who held a 52.6 per cent stake as of the end of July, still have faith in Country Garden’s turnaround, despite a history of funding support? Her outsize ownership can materially change the builder’s financial policy and its attitude towards bondholders.

The construction site of residential buildings by Chinese developer Country Garden in Beijing.Credit: Reuters

In China, capital-intensive real estate development is long past its prime, while property management and services are the future. Indeed, in the first half, Country Garden Services is expected to report up to 2.6 billion yuan in net profit, while the troubled development unit may see up to 55 billion yuan in net loss. To figure out whether the distressed tycoons are willing to negotiate on debt, it’s important to look at the relationship between their business divisions.

Call me hard-nosed, but Yang may no longer care. Country Garden and Country Garden Services are sister companies, both ultimately controlled by Yang. In late July, the 41-year-old gave about 55 per cent of her personal stake in the property management unit to a charity founded by her sibling, while keeping the voting rights. The charity will hold the shares for 10 years.

This corporate structure is in stark contrast to, say, Sun Hongbin’s empire. Sunac Services is controlled by the development unit, Sunac China Holdings. As such, the billionaire has a financial incentive to restructure Sunac China and even offer sweeteners.

Whatever happens to Country Garden, most investors can agree on one thing: for two years, the builder has tried hard to honour its obligations even as others became delinquent amid the government’s harsh regulatory crackdowns. Country Garden is just at the end of the road.


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