Chinese homebuilder Country Garden warns it could default after posting $7 billion loss

By Laura He and Mark Thompson, CNN

Hong Kong/London (CNN) — Country Garden warned Wednesday that it could default on its vast debts as it reported a loss of 51.5 billion yuan ($7 billion) for the first six months of the year.

The company, which was China’s largest residential developer last year, said it had been caught off guard by the depth and persistence of the slump in the real estate market, particularly in smaller Chinese cities, and had failed to react fast enough.

“The company felt deeply remorseful for the unsatisfactory performance,” it said in a filing to the Hong Kong stock exchange.

Country Garden confirmed that it had missed interest payments to holders of some of its bonds earlier this month, and that “if the financial performance of the company continues to deteriorate in the future” the group may default.

“All of the above … indicated the existence of material uncertainties which may cast significant doubt on the group’s ability to continue as a going concern,” it added in the filing.

The troubled real estate giant is battling a liquidity crisis which some fear could spread to China’s wider economy and even spill over abroad.

The Foshan, Guangdong-based company said earlier Wednesday that it plans to issue new shares worth 270 million Hong Kong dollars ($34.4 million) to Kingboard Holdings, a manufacturer of laminates based in Hong Kong, in lieu of a loan that was due for repayment.

The announcement came on the same day that a major Chinese city, Guangzhou, relaxed mortgage rules for homebuyers in a bid to support the embattled property sector.

On Monday, the company said its $100 billion project in Malaysia, its largest overseas development, was “operating normally,” adding that its operation in the region was “safe and stable.” The announcement, along with China’s latest measures to support the sector, gave a brief lift to Country Garden’s shares in Hong Kong.

But the stock is still down 67% this year, and the company is being squeezed.

Country Garden has nearly $200 billion in total liabilities. It faces mounting pressure to pay off its debts — it has about 31 billion yuan ($4.3 billion) in bonds set to mature through the end of 2024, according to Moody’s.

Earlier this month, reports of the company missing payments on two dollar-denominated bonds shocked the market. And last week, the company moved a deadline from August 25 to August 31 for bondholders to vote on a plan to extend payment on a 3.9 billion yuan ($530 million) bond.

‘Biggest difficulty’

Investors worry that a debt default by the company could deal a further blow to already fragile investor confidence as Beijing tries to rescue the ailing sector, which is key to China’s economic growth.

On August 10, Country Garden acknowledged that it was facing the “biggest difficulty” since its establishment in 1992, citing deteriorating sales and a difficult refinancing environment.

The news triggered a sell-off in the company’s securities, forcing it briefly to suspend trading in 11 of its onshore bonds. Chinese state media reported at the time that the developer was expected to start a debt restructuring soon.

On Wednesday, Guangzhou became the first major Chinese city to announce an easing of mortgage regulations aimed at encouraging homebuying.

Under the new rules, people who have held mortgages previously can be considered first-time homebuyers and enjoy preferential loans, according to a notice by the city’s government.

The move came days after three Chinese regulators issued a joint statement allowing local governments to loosen mortgage restrictions, as part of the central government’s efforts to revive buyer demand.

Among other efforts, the housing and tax authorities jointly said Friday they would extend personal income tax rebates for people who buy new homes within one year after selling previous properties.

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