By Scott Murdoch, Clare Jim and Xie Yu
HONG KONG (Reuters) -Country Garden warned on Tuesday about its inability to meet offshore debt obligations, potentially joining a growing list of Chinese developers that have defaulted and setting the stage for one of the country's biggest debt restructurings.
Companies accounting for 40% of Chinese home sales - mostly private property developers - have defaulted on debt obligations since a liquidity crisis hit the sector in 2021, leaving many homes unfinished.
Country Garden, China's largest private property developer, has not defaulted so far, but has missed coupon payments on some dollar bonds since last month and faces the end of 30-day grace periods for making payments from next week.
In a filing with the Hong Kong stock exchange on Tuesday, Country Garden said that its sales and financing were facing "significant challenges", and its available funds have continued to decrease.
The company said it would "not be able to meet all of its offshore payment obligations when due or within the relevant grace periods", adding non-payment may lead to creditors demanding payment acceleration or pursuing enforcement action.
Country Garden's warning underscores how an unprecedented liquidity squeeze in the Chinese property sector, accounting for roughly a quarter of the economy, and weaker sales continue to darken prospects for developers.
Beijing has rolled out a raft of measures in recent months, including reducing deposit requirements and cutting existing mortgage rates, to help renew homebuyers' confidence, but growing debt woes of developers was unlikely to help achieve that goal.
Country Garden, which has $10.96 billion of offshore bonds and 42.7 billion yuan ($5.86 billion) worth of offshore loans, said it was facing "significant" uncertainty regarding the disposal of assets and its cash position remained under pressure.
The developer said it had appointed Houlihan Lokey (NYSE:HLI), China International Capital Corporation (CICC) and law firm Sidley Austin as advisers to examine its capital structure and liquidity position and formulate a holistic solution.
The company added it will work with advisers to develop the most pragmatic and optimal solution for all stakeholders, and called for patience from creditors.
Morningstar analyst Jeff Zhang said mandating advisers showed "whether the company will default hinges on the outcome of overseas debt restructuring and the next two weeks will be crucial."
"We do not expect Country Garden's liquidity to materially improve as homebuyers and financial institutions may continue to stay on the sidelines."
BIG TEST LOOMS
China's latest property sector slump started in 2021 after a government-led crackdown on a debt-fuelled building boom. It has deepened as economic growth faltered and confidence in housing and capital markets dried up, further squeezing developers' liquidity.
Country Garden was due on Monday to pay $66.8 million in coupons on 2024 and 2026 dollar bonds, although the payments have a 30-day grace period. The developer has not disclosed whether those payments were made.
The developer did not make a principal payment of HK$470 million ($60.04 million) on certain debts, it said in Tuesday's filing, without providing further details.
Country Garden faces a big test next week when its entire offshore debt could be deemed in default if it fails to pay a $15 million September coupon by Oct. 17, at the end of the 30-day grace period.
It has, however, won approval from onshore bondholders for the extension of nine series of bonds with an outstanding principal value of 14.7 billion yuan ($2.02 billion), the filing said.
The extension has provided it "with the time and space to focus on the recovery of its business operations," it added.
LIQUIDATION PETITIONS
Country Garden's shares extended losses on Tuesday to drop more than 10% by the afternoon, having lost nearly 70% of their value since the start of the year.
"The company's previous model was not sustainable, they are now addressing it, trying to scale down their debt burden and make their business size appropriate," said Sandra Chow, CreditSight's co-head of Asia Pacific research.
"There is a smaller property market overall and it makes sense to adapt to that," she said, adding that a restructuring would look to extend debt maturity repayments, reduce bond coupon rates and accelerate asset sales.
Country Garden said it would make "its best effort to ensure the delivery of properties, which is the group's most critical corporate responsibility and is the key pillar to safeguard the property market."
Many defaulted developers, including China Evergrande (HK:3333) Group, which is at the centre of the debt crisis, are facing liquidation petitions. So far, only a couple have been ordered to wind up by overseas courts.
Smaller peer Kaisa Group said creditors would get less than 5% of their money back if it is forced into liquidation, a lawyer for one creditor, Broad Peak Investment, who has filed a winding up petition against the developer, told a Hong Kong court on Tuesday.
($1 = 7.8284 Hong Kong dollars)