China’s biggest developer is pulling out all the stops to ensure it can service its debt ...
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HONG KONG (July 27): China’s biggest developer is pulling out all the stops to ensure it can service its debt, an indication that the industry’s year-long liquidity crunch is worsening even as policymakers pledge support.
Country Garden Holdings Co is selling stock at a 13% discount to raise HK$2.83 billion (US$361 million). Some of the proceeds will be used to repay offshore debt, it said, helping spur gains in the company’s dollar bonds — held by global investors such as BlackRock Inc and Schroders Plc.
Home sales in the world’s second-largest economy have tumbled for a year, while a government deleveraging campaign has squeezed funding and led to a slew of defaults. Country Garden’s fundraising is a sign that even the healthiest developers are in distress with the sector unable to take advantage from the ample cash sloshing around China’s banking system.
The move “suggests a challenging funding environment for China’s privately owned companies in light of the property downturn”, said Agnes Wong, head of APAC credit strategy at BNP Paribas.
Country Garden’s debt woes and rating slide into the junk category earlier this year formed part of a watershed moment in China’s credit market, when financial stress began spreading from weaker developers to once healthy-looking peers and state-backed companies.
It was a stunning reversal for a developer that was until recently considered one of China’s safer private-sector builders. A dollar bond due 2024 fell to a record low of about 33 cents last week from near par at the start of this year, before rebounding to 42.6 cents Wednesday.
Its shares slumped 15% on Wednesday, taking this year’s slide to more than 50%.
The placement “shows its desperation for cash amid weakening liquidity” while negative factors including rising delivery costs of presold homes, slowing contracted sales and challenges in selling bonds onshore are hurting its cash flows, Bloomberg Intelligence analysts including Kristy Hung wrote in a note.
Markets are still indicating concerns about the developer’s repayment risks, with its dollar bonds still in distressed territory. While stocks and bonds of Chinese real estate firms have risen sharply recently amid signs of growing state support for a struggling housing sector, many observers say a longer-term rebound in home sales is necessary to sustain any market rally.
Still, the plan could open a path forward for the sector by capitalising on optimism of state support to draw investors betting on a bottom. The last share placement conducted by a Chinese developer was a relatively small one by Times China Holdings Ltd in late January.
“More Chinese developers could look to raise funds through share sales if they are able to do so, particularly given that the bond funding channel remains shut for privately-owned developers while they still have significant near-term refinancing needs,” said Christy Lee, portfolio manager at AXA Investment Management.
Sale proceeds
The Guangdong province-based developer had initially offered 840 million shares at the same price, according to terms of the deal obtained by Bloomberg News. Proceeds of the share sales will be used for repaying offshore debts, general working capital and future development purposes, according to a Hong Kong Stock Exchange filing Wednesday.
In an emailed statement, Country Garden said the share sale will help it buy back bonds both onshore and offshore, further reducing its debt pile.
Country Garden’s share sale plan “aligns with the company’s direction to explore various financing channels”, said Shu Hui Woon, credit analyst at Lucror Analytics. “The use of funds to repay offshore indebtedness will provide assurance for offshore noteholders especially when most developers prioritise onshore payment.”
