Bond Guarantees Face First Major Test with Country Garden Deadlines

Country Garden Holdings Co., one of China’s most indebted builders, is set to test the state guarantee program this week as it faces two interest payments totaling 65.95 million yuan ($9.1 million). These payments are guaranteed by China Bond Insurance Co., a state-owned credit-support provider that aims to help private developers avoid liquidity issues.

While Country Garden has not missed any payments on the guaranteed securities, the company recently faced its first local default on yuan bonds and missed payments on dollar notes last year. The builder is currently fighting a liquidation petition in a Hong Kong court, with the first hearing scheduled for May 17.

Analysts are closely watching the situation, with Zerlina Zeng from Creditsights Inc. stating, “It is unclear whether Country Garden has the cash and willingness to pay the coupon given the sharp and continued contraction of its contracted sales.” However, there is an expectation that China Bond will step in if Country Garden fails to make the payment to maintain market confidence in the bond guarantee program.

The state guarantee program has seen 33 bonds issued by private developers, raising a total of 33.7 billion yuan. While most payments on these bonds are not due until 2025 or 2026, the program has yet to face a significant test. Country Garden’s substantial size, with over 3,000 housing projects mainly in smaller cities, highlights its importance to the broader economy and the potential impact on the government if the guarantee program needs to be utilized.

With the property crisis hitting hard, Country Garden is now burdened with 1.36 trillion yuan in total liabilities, according to its unaudited 2023 interim results. The company’s contracted sales for April have also significantly decreased compared to the same period last year, reflecting the challenges faced by Chinese private developers in completing pre-sold homes amidst a 4 trillion yuan funding gap.