A crisis engulfing China’s property sector is affecting its biggest developer, with Country Garden Holdings Co’s (碧桂園) shares and bonds hammered amid fears that a reportedly failed fundraising effort might be a harbinger of waning confidence.
Country Garden is one of the few remaining large, better-quality private developers that had been largely unscathed by the liquidity crunch, even as peers, such as Shimao Group Holdings Ltd (世茂集團), saw dramatic reversals in their credit ratings.
The firm is viewed as a bellwether for contagion risk, as unprecedented levels of stress in the offshore credit market threaten to drag good credits down alongside bad ones.
Since taking the top spot from China Evergrande Group (恆大集團) in 2017, Country Garden has remained China’s largest developer by contracted sales. It employs more than 200,000 people.
Headquartered in the southern city of Foshan, the firm — like Evergrande — has in the past few year focused on building housing developments in lower-tier cities.
It has relied heavily on access to funding in the offshore credit market, like many peers that binged on debt to fuel growth.
It has the largest pool of outstanding dollar bonds among China’s biggest property firms, excluding defaulters, with about US$11.7 billion outstanding, Bloomberg-compiled data showed.
Country Garden’s founding chairman, Yeung Kwok Keung (楊國強), in 2005 transferred his controlling stake to his daughter, Yang Huiyan (楊惠妍).
She is now the firm’s vice chairwoman and the richest woman in China, the Bloomberg Billionaire Index showed.
Some of Country Garden’s US dollar notes plunged to record lows in the wake of a report that the firm failed to win sufficient investor support for a possible convertible bond deal.
As of late Friday, longer-dated bonds were trading as low as US$0.69 on the US dollar.
The developer has been relatively resilient in the face of the liquidity crisis sparked by a Chinese government crackdown on excessive borrowing by builders and housing market speculation, and was unscathed by the crisis at industry giant Evergrande.
While Country Garden is not expected to face imminent repayment pressure — it has US$1.1 billion of US dollar bonds due this year and had 186 billion yuan (US$29.3 billion) of available cash as of June last year — risks might emerge if it is seen to have limited access to funding.
Any sign of doubt in the firm’s capacity to weather liquidity stress risks might prompt a widespread repricing of other higher-quality developers.
With a total of more than 3,000 housing projects in almost every province in China, Country Garden’s financial health has immense economic and social consequences.
If the firm starts showing signs of stress, it would severely damage already fragile investor and homebuyer confidence, posing threats to China’s economy and even social stability.
More than 60 percent of Country Garden’s contracted sales in China came from third and fourth-tier cities, an interim report said last year.
Demand in lower-tier areas might significantly weaken this year, Fitch Ratings Ltd analysts forecast.
Being a “pure developer,” Country Garden is less flexible when it comes to raising cash by selling assets, Bloomberg Intelligence analyst Andrew Chan said.
Country Garden’s strategy is to manage its current assets effectively, in addition to expanding its business, the company said.
“The firm is experiencing less volatility than the overall market” amid a broader market downturn, Country Garden said.
The developer sold bonds and asset-backed securities in the local market last month, reflecting support from investors and regulators, and maintained its ratings at all three major rating firms last year, it said.
Country Garden might find it difficult to revive sales this year amid weakening market sentiment in lower-tier cities, where 77 percent of its land bank is located, Bloomberg Intelligence analyst Kristy Hung said.
Investors are scrutinizing Country Garden’s capacity to raise funding from a variety of channels, particularly as the offshore credit market remains effectively closed to most developers. It needs to repay or refinance about US$1.3 billion on bonds this year, the majority of which are US dollar notes.
Country Garden’s next maturity is a US$425 million bond due on Thursday next week.
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