On May 14th, Chinese developer Country Garden announced a debt default, marking the second Chinese real estate company to default on debt in May. Along with financing data for the first quarter of this year showing continued funding strain for mainland real estate enterprises, the situation reflects ongoing financial tension within the industry. Additionally, the Chinese authorities’ “white list” policy aimed at rescuing real estate companies has made limited progress due to a lack of funds.
One creditor holding bonds issued by Country Garden expressed concerns on May 13th as they had not received the due interest on the bond. The bond in question is a USD bond with a 6.05% interest rate set to mature in 2025. According to the bond issuance announcement, failure to pay interest for 30 consecutive days constitutes a default event.
On May 14th, Country Garden released a statement citing liquidity pressures as the reason for not meeting interest payments on 2020 notes by the payment deadline of May 13, 2024. They anticipated being unable to fulfill all payment obligations under their foreign debts moving forward.
Liu Shui, Director of Corporate Research at China Index Research Institute, speaking to First Financial on May 14th, highlighted that real estate enterprises facing difficulties in repaying maturing debts may require debt restructuring due to the lack of improvement in liquidity. Data from CRIC shows a significant decline in bond financing for real estate companies, leading to tighter liquidity situations as reflected in dwindling financing scales month by month throughout 2024.
In addition to debt defaults, companies that have already undergone debt restructuring are now seeking further restructuring of their debts. For example, in September 2023, Country Garden completed a domestic debt restructuring of approximately 14.7 billion RMB, extending the maturity of nine domestic debts by a total of three years.
In April of this year, Country Garden initiated a new round of extensions for bonds such as “21 Country Garden 01,” “21 Country Garden 02,” and “21 Country Garden 04,” postponing interest or principal payments due before September to be paid by that month. Similarly, Sunac China Holdings recently experienced a similar situation, planning to adjust repayments for four bonds and extending the maturity of both principal and interest payments originally due in June and September to December.
Sunac China Holdings stated that the pressure on their cash flow is far beyond what was expected when the credit bond restructuring was approved at the end of 2022.
The increasing incidences of default and subsequent debt restructuring highlight the current financial pressures faced by real estate companies. In the declining real estate market in China, where developers often divert funds received from pre-sales, the sharp drop in sales revenue exacerbates the financial strain on these enterprises.
Taking Country Garden as an example, their pre-sales totalled 6.55 billion RMB as of April 30th, a year-on-year decrease of 68.0% and 73.9% compared to 2023 and 2022 respectively.
Country Garden’s annual report for 2023 revealed a 19.8% year-on-year decrease in revenue reaching approximately 43.31 billion RMB, with an operating loss of 9.55 billion RMB, indicating a 46.7% increase from the same period in 2022.
The shortage of funds in real estate enterprises has led to numerous unfinished projects, prompting the Chinese authorities to introduce the “white list” policy to salvage the industry. By the end of March, 1979 projects were granted credit by banks under the “white list,” amounting to 469.03 billion RMB. However, only 1247 projects received loans totalling 155.41 billion RMB.
Some analysts argue that the implementation of the “white list” policy is merely wishful thinking by the Chinese government, which lacks the necessary funds to fully execute it.
CRIC believes that despite real estate projects being included in the Ministry of Housing and Urban-Rural Development’s “white list,” they still need to undergo evaluations and screenings by banks. The actual effects of the policy remain to be seen.
International rating agency Fitch Ratings has noted that the qualification standards for projects on the “white list” are stringent, including requirements for normal development, sufficient collateral, a reasonable asset-liability structure, and secure repayment sources. These strict criteria mean that some projects already included in the list may still face rejection from banks.
Multiple real estate industry insiders have conveyed that the progress of financing for the company’s “white list” projects is not ideal. An individual within a troubled real estate company revealed that out of a total of 28 shortlisted projects, only three have received approval, with loans granted for just two of them.