Moody’s further downgrades Chinese giant Country Garden
BEIJING: Moody’s further downgraded the credit ratings of Chinese property developer Country Garden on Thursday as the heavily indebted firm faces a crucial vote to avoid defaulting on a bond repayment.
NANJING,China: A residential complex built by Chinese property developer Country Garden is seen in Nanjing, in China's eastern Jiangsu province on August 31, 2023. -- AFP.
The ratings firm said it had cut Country Garden from Caa1 to Ca, indicating obligations that are “highly speculative and are likely in, or very near, default”. “The rating downgrades with negative outlook reflect Country Garden’s tight liquidity and heightened default risk, as well as the likely weak recovery prospects for the company’s bondholders,” said Kaven Tsang, a Senior Vice President of Moody’s.
The embattled real estate giant is estimated to “not have sufficient internal cash sources to address its upcoming offshore bond maturity”, according to Moody’s. The ratings for Country Garden, China’s largest private developer in terms of sales last year, were last cut by Moody’s on August 10, dropping from B1 to Caa1. Bondholders are holding a crucial vote Thursday to decide whether to allow the firm to delay a bond repayment to give it time to recover financially. The firm has amassed more than $150 billion in debt and said in August it had failed to make two bond payments, meaning it now risks a default.
The firm’s cash flow woes have fuelled fears that it could collapse, which many warn could have catastrophic repercussions for the Chinese financial system and economy. Country Garden faces a crunch vote on Thursday in its effort to avoid default, after reporting a record loss and warning it was struggling to stay in business. One of China’s biggest builders, the firm has racked up debts of more than $150 billion and this week reported a record 48.9 billion yuan ($6.7 billion) loss for the first six months of the year.
The group warned Wednesday that it faced a default if its financial performance “continues to deteriorate”, adding it “felt deeply remorseful for the unsatisfactory performance”. Bondholders are due to conclude a crunch vote Thursday on whether to extend repayment on a key note worth $535 million. Creditors have until 10 pm (1400 GMT) to decide on a proposal to postpone this payment, according to Bloomberg. The vote was originally scheduled to end last Friday, but was delayed at the last minute. Adding to the complex situation, a group of bondholders are seeking to declare a default on the payment, according to Bloomberg.
If the plan is refused, Country Garden could become the biggest Chinese real estate firm to default since rival Evergrande in 2021. It also faces a deadline for two separate bond payments at the beginning of September worth a total of $22.5 million. The company’s woes appeared to have not affected traders Thursday, with its shares rising 6.8 percent in Hong Kong. But Country Garden’s cash-flow problems have ignited fears that it could collapse and spread further contagion through China’s economy, which is already suffering from record-high youth unemployment and flagging consumption.
The nation’s economic rise has been largely founded on property and construction, which account for about a quarter of gross domestic product. But a years-long government credit crunch and crippling debts among many developers have hit the sector hard. Country Garden has four times as many projects as Evergrande, whose stalled development led to protests and payment strikes last year. It has extensive operations in small cities, which host about 60 percent of its projects. But that is where recent drops in China’s property prices have been most pronounced, and where customers have limited purchasing power.
At the end of 2022, Country Garden listed more than 3,000 active construction sites, including around 30 abroad, mainly in Australia, Indonesia and the United States. Any prolonged suspension of work at the sites could threaten social unrest, as Chinese homeowners often pay for new properties before the building is fully constructed. The group warned Wednesday that if its financial performance “continues to deteriorate” it faces possible default. If Country Garden does not meet a deadline for a bond payment at the beginning of September, it could become the biggest Chinese real estate firm to crash since rival Evergrande in 2021.—AFP.
