China's Largest Property Developer Misses Its First Bond Payment, While Another Heads To Court With Creditors Next Week

Two of China’s largest property developers, Country Garden Holdings Limited CTRYF CTRYY and China Evergrande Group EVGRF are fighting for their survival as one missed a bond payment Wednesday and the other faces a courtroom next week.

According to local reports, Country Garden, which is China’s largest property firm by number of developments, missed its first-ever bond payment on $15.4 million offshore interest payments Wednesday morning. Country Garden has $186 billion of liabilities, making it one of the most indebted property developers in the world.

JP Morgan & Chase Co JPM analyst Karl Chan said that the missed payment would speak a series of defaults on all of its $10 billion in offshore bonds.

Country Garden won agreement among its creditors last month to extend credit terms on eight of its onshore bonds worth 10.8 billion RMB ($1.5 billion), delaying repayments by a further three years.

Country Garden’s junk bonds are trading at around 4 cents on the dollar now, about 20% below what they were last month when the developer warned it may miss further payments.

“The company expects that it won’t be able to meet all of its offshore payment obligations on time, due to a deep correction in China’s home market and its subdued sales,” the company told Bloomberg in a statement Wednesday afternoon.

Meanwhile, rival Evergrande faces liquidation at the end of the month when a court hearing for the embattled developer will decide its fate.

For Evergrande, its $327 billion in liabilities have kicked it into court after the company cancelled planned creditor meetings at the eleventh-hour last month and its founder, Hui Ka Yan, is now facing a criminal investigation by Chinese authorities.

China’s government stepped up support for a select group of struggling property developers last year, of which Country Garden and CIFI Holdings (Group) Company, which also recently defaulted on its offshore debt, were beneficiaries.

The credit rout has splayed values of offshore bonds offered by Chinese developers, most of which have now slumped into distressed territory. Longfor Group Holdings Limited’s LNGPF 2027 3.375% dollar bonds and its 3.85% 2032 dollar bonds have plunged 25% and 30%, respectively, in recent weeks while Monday, bonds of Gemdale Corp and Seazen Group Ltd. SZENF dropped 16% in value.

Why It Matters: Around a third of nearly all Chinese household income is invested in property, roughly the same percentage as that represented in Wednesday’s annual income savings rate. The more that property developers continue to wreak havoc on the local stock market, the worse that is for consumer confidence, too.

The scenario is one which asset managers locally call a death-spiral in which worse property and stock price performance leads to less spending which puts pressure on retailers’ earnings. This cycle is apparent in the increasingly smaller P/E valuations of Chinese shares and in the performance of China tracker funds such as the iShares China Large-Cap FXI which is down 10% year-to-date vs. the S&P 500 ETF Trust SPY, up 14.5% in the same period.

The extent of liabilities in the Chinese property markets that are hidden in China’s banking and insurance sectors has weighed on stocks the past week as more troubling reports have emerged from the sectors.

To this effect, defaults of large developers are likely to incentivize further plans of government intervention to kick-start Hong Kong and China markets again and cushion the blow of other unknown potential defaults that may be to come.