China’s real estate crisis hits the country garden of the biggest builder
(Bloomberg) – The crisis engulfing China’s real estate sector is impacting its biggest promoter, with shares and bonds of Country Garden Holdings Co. hammered amid fears that a failed fundraising effort could be the harbinger of a loss of confidence.
Country Garden is one of the few higher quality large private developers to have been largely unaffected by the liquidity crunch, although peers such as Shimao Group Holdings Ltd. saw their credit ratings reverse dramatically.
The company is seen as an indicator of contagion risk as unprecedented levels of stress in the offshore credit market threaten to drive down good credit along with bad.
What is the company?
Since taking the top spot in China Evergrande Group in 2017, Country Garden has remained the country’s largest developer in China by contract sales. It employs more than 200,000 people.
Based in the southern city of Foshan in Guangdong province, the company – like China Evergrande Group – has focused in recent years on building housing estates in lower-tier cities.
It has relied heavily on access to finance in the offshore credit market, like many peers who have bet on debt to fuel growth. It has the largest pool of outstanding dollar bonds among China’s largest property companies, excluding defaulters, with some $11.7 billion outstanding, according to data compiled by Bloomberg.
Founding chairman Yeung Kwok Keung transferred his majority stake to his daughter Yang Huiyan in 2005. She is now vice chairman of the company and is China’s richest woman, according to a Bloomberg Billionaire Index.
What is happening?
Some of Country Garden’s dollar bills plunged to record lows following a report that the company failed to garner sufficient investor support for a potential convertible bond deal. Longer-term bonds were trading as low as 69 cents on the dollar Friday night.
The developer has been relatively resilient in the face of the liquidity crisis triggered by a government crackdown on excessive builder borrowing and property market speculation, and has been unaffected by the crisis at industry giant Evergrande.
Although Country Garden is not expected to face imminent repayment pressure – it has $1.1 billion in dollar obligations due this year and had 186 billion yuan ($29.3 billion) in free cash. in June last year – risks may arise if seen have limited access to funding.
Country Garden did not immediately respond to a Bloomberg request for comment on Friday afternoon.
Why is this important?
Any sign of doubt about the firm’s ability to weather liquidity stress risks may lead to a widespread reassessment of other high-quality promoters.
With over 3,000 housing projects located in almost every province in China, Country Garden’s financial health has immense economic and social consequences. If the company begins to show signs of stress, it will seriously damage the already fragile confidence of investors and homebuyers, which will threaten the Chinese economy and even social stability.
According to its 2021 interim report, more than 60% of Country Garden’s contract sales in mainland China came from third- and fourth-tier cities. Demand in lower-tier areas could weaken significantly in 2022, according to a forecast from Fitch analysts. Being a “pure developer” it is less flexible when it comes to raising funds by selling assets, according to Bloomberg Intelligence analyst Andrew Chan.
What does the company say?
Country Garden’s strategy is to effectively manage its current assets, in addition to growing its business, the company said in response to inquiries from Bloomberg News. “The business is experiencing less volatility than the broader market” amid a broader market downturn, he said.
The developer sold bonds and asset-backed securities in the local market in December, reflecting support from investors and regulators, and maintained its ratings with all three major rating agencies last year, according to comments.
What are the rating agencies and analysts saying?
Country Garden holds both investment-grade and high-yield credit ratings from all three leading risk assessors, making it a so-called crossover name that could potentially become a “fallen angel.” That in turn could increase its borrowing costs and eliminate another builder from the dwindling pool of higher-rated developers that investors can turn to during the credit crunch.
It has the equivalent of a triple B investment grade rating from Moody’s Investor Services and Fitch Ratings, and the highest possible speculative rating from S&P Global Ratings. Still, the borrower is likely to “strengthen its financial resilience by controlling debt growth and maintaining disciplined land acquisitions,” S&P analysts wrote in a September report that reaffirmed its rating.
The builder could struggle to revive sales in 2022 with weakening market sentiment in lower-tier cities, where 77% of its land reserve is located, according to Bloomberg Intelligence analyst Kristy Hung. The considerable amount of land newly acquired by the company continues to be located in these areas, raising new concerns about raising money, she wrote.
What do traders expect next?
Investors are now looking at Country Garden’s ability to raise funds from various channels, especially as the offshore credit market remains effectively closed to most developers. It must repay or refinance some $1.3 billion in bonds this year, the majority of which are dollar notes. Its next maturity is a $425 million bond due Jan. 27.
Attention has also turned to the contagion effects of falling Country Garden bond prices on the ratings of other stronger developers, as fears of contagion risks remain high.
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