Country Garden’s debt restructure hinges on stabilizing property market

The debt-laden developer released two long-overdue financial reports last week after detailing a clearly defined debt restructuring plan

Key Takeaways:

• Country Garden revealed it lost 12.84 billion yuan in the first half of last year, as it released its long delayed interim report for 2024
• The report showed the struggling developer’s total outstanding liabilities stood at 250.2 billion yuan at the end of last June

By Lau Chi Hang

The clock has been ticking down on debt-laden developer Country Garden Holdings Co. Ltd. (2007.HK) following the suspension of trading of its Hong Kong-listed shares last April after it failed to publish its 2023 financial statement on time. Its broader financial woes aside, the company’s stock could also be de-listed under Hong Kong Stock Exchange rules if it fails to resume trading within 18 months – or by October this year.

As it scrambles to regain compliance, the company, after considerable effort, finally published its annual results for 2023 and its interim report for the first half of last year, both last week. While the numbers weren’t pretty, the exercise was critical to bringing the company back into the stock exchange’s good graces as it tries to maintain its listing.

Dwindling cash

The pair of reports showed Country Garden’s revenue fell 6.8% year-on-year in 2023, as it recorded a massive loss of 167.3 billion yuan ($22.8 billion). Its liabilities at the end of that year totaled 249.6 billion yuan, and it had 63.8 billion yuan in cash.

Things deteriorated sharply in the first half of last year, as its revenue fell 55% year-on-year to 102.1 billion yuan. Its loss narrowed by 73% but was still sizable at 12.8 billion yuan. Meanwhile, its bank and other borrowings at the end of last June stood at a whopping 121.85 billion yuan. It had 250.2 billion yuan in total liabilities and operating cash flow of negative 185 million yuan for the period. And at the end of June, its cash was down to just 6.7 billion yuan.  

Although the business has yet to see signs of improvement as China’s property market continues to sag, the company is making progress on another important front with its debt restructuring.

Earlier this month it released a restructuring proposal and reached consensus with a committee composed of seven banks. If implemented, the plan would allow Country Garden to significantly deleverage, with a targeted debt reduction of up to $11.6 billion. The plan also includes an extension of up to 11.5 years on its outstanding debt, with an aim of reducing its fundraising costs from a weighted average annual borrowing cost of about 6% to about 2%. Controlling shareholders are also considering swapping out $1.1 billion in outstanding loans owed by the company for shares of Country Garden or its subsidiaries.

The release of the pair of financial reports could pave the way for the company’s stock to resume trading, while the latest restructuring proposal represents another step forward in Country Garden’s long road toward its goal of eventually returning to financial health. However, the situation is far more fraught with potential obstacles than at first meets the eye.

Some foreign media have cited people familiar with the situation saying the company’s main creditor group has yet to sign off on terms for the offshore debt restructuring. That group accounts for over 30% of a tranche of its offshore debt totaling $10.4 billion.

All about the property market

In addition, Country Garden’s restructuring is directly tied to improvements in its cashflow that could be difficult in the current market. The company estimates that its 29 international projects can bring in cumulative debt-free cash flow of $2.6 billion to $3 billion between 2024 to 2040. Additionally, it expects to raise approximately $600 million to $800 million in cash between January 2025 and 2033 by selling financial investments.

Property sales in its core China market will be one of the most critical factors in any return to financial health. According to its own projection, it will have between 20 billion yuan and 25 billion yuan in cash available for offshore debt servicing between 2024 and 2039.

Several assumptions underlie the company’s cashflow projections. One of the most basic is its ability to maintain its status as a going concern with continuous operations and normal business activity as the domestic property market starts to stabilize. Another is the assumption that average selling prices of its domestic projects will experience only low-single-digit declines this year, followed by low- to mid-single-digit growth from 2026 to 2032, stabilizing at low single-digit growth in 2033.

In other words, the company can only realize its projections if the property market bottoms out this year and starts a gradual recovery in 2026, and if all its creditors get on board with its restructuring proposal.

On the latter point, the company has come up with a clear and well-defined proposal. Though not all creditors have necessarily signed on, it’s at least a step forward. Meantime, the domestic property market remains the biggest wild card and potential spoiler. China’s property market remains in a deep slump, and no one can say for sure if prices will only decline slightly this year and start to rebound in 2025. And even a stabilizing market by itself wouldn’t necessarily guarantee a more positive outlook for the company.

Shrinking sales

Its creditors are most worried about Country Garden’s ability to deliver homes when it’s mired in a mountain of debt. Even home buyers in the market are shunning high-risk developers like Country Garden. And they have plenty of alternatives in a massively oversupplied Chinese market filled with developers desperate to sell.

Country Garden’s sales have been deteriorating over the last few years, dropping 36% from 558 billion yuan in 2021 to 357.5 billion yuan in 2022, then tumbling another 51% to 174.3 billion yuan in 2023, before crashing 73% last year to just 47.2 billion yuan. The company seems to be reaping little or no benefit from a near nonstop rollout of government measures to stabilize the market over the past year.

Another major development saw PricewaterhouseCoopers (PwC) resign as Country Garden’s outside accountant last September, replaced by Zhonghui Anda Cpa. In its resignation letter, PwC pointed out delays in the company’s provision of data and documents, including cashflow projections, impairment assessments on its properties under construction and completed, as well as loss assessment on receivables, hampered its own ability to compile Country Garden’s financial statements. Without sufficient information to back its cashflow projections at that time, how accurate could its current projections be?

As things now stand, even if Country Garden can resume trading and get its restructuring plan approved, its ability to stay in business will depend on a funding situation that hinges on stabilization of China’s property market. None of those factors are within the company’s control, leaving it with no choice but to feel its way slowly forward in hopes for returning to better times.

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