Country Garden warns of default risks, 'deeply remorseful' for record loss

A view of the construction at the Country Gardens' Forest City project in Johor Bahru

By Clare Jim

HONG KONG (Reuters) -China's largest private property developer warned on Wednesday of default risks if its financial performance continues to deteriorate, and said it "felt deeply remorseful" for its record loss in the first half.

Country Garden posted a net loss between January and June of 48.9 billion yuan ($6.72 billion), versus a 6.7 billion yuan net loss in the second half of 2022 and a 612 million yuan net profit in the first half of 2022.

The results come as Chinese authorities take steps to revive the troubled property market, which accounts for roughly a quarter of the economy. The sector's woes have raised concerns that it could have a destabilising impact on an economy already weakened by rising unemployment and falling demand.

The property sector has seen many company defaults since late-2021, resulting in uncompleted homes and unpaid suppliers and creditors.

The liquidity stress in Country Garden became public this month after it missed two dollar-coupon payments - which the developer confirmed for the first time on Wednesday - and sought to extend an onshore private bond repayment, deepening contagion fears.

"If the financial performance of the group continues to deteriorate in the future, the group might not be able to fulfil the financial covenants of these borrowings, which may result in default in these borrowings and cross-default in certain other borrowings," the developer said in a filing.

It added it will consider debt management measures to cope with the remaining overseas debts coming due through the end of June next year, including negotiations with onshore banks on renewing and extending existing loans.

Country Garden said its revenue in the first half rose 40% from a year earlier but its cost of sales surged 73%, while total liabilities were unchanged from the end of 2022, at 1.4 trillion yuan.

Its total interest-bearing debts decreased to 257.9 billion yuan, of which 108.7 billion yuan would be due within 12 months, while it had total cash of 101.1 billion yuan.

"The company feels deeply remorseful for the unsatisfactory performance," it said.

Some offshore creditors of Country Garden are in talks with a New York-based law firm and are considering options including legal ones, by forming a group if the company seeks to restructure its debt.

Kobre & Kim LLP told Reuters on Wednesday it had been in discussions with creditors interested in forming a group and weighing their options, including some specialized in distressed credit and experienced in using strategies to improve value in debt restructuring cases.

Country Garden shares closed down 3.3% at HK$0.88 before the earnings announcement.

Early on Wednesday, Country Garden said it would issue HK$270 million ($34.4 million) worth of new shares to an investment unit of Hong Kong-based manufacturer Kingboard Holdings, which would reduce its outstanding loan to the unit to HK$1.6 billion.

The company said the issue would help "preserve cash resources... and reduce the gearing level." The new shares, representing 1.25% of the enlarged share capital, would be issued at HK$0.77 each, a 15.4% discount from Tuesday's closing price.

Many Chinese developers have so far posted losses or drops in profit for the first half as nationwide sales soften.

State-backed China Resources Land told an earnings conference on Wednesday it expected the country's home sales in the full year would be flat from last year or register a small decline, as demand was dropping long term. It added that the number of visitors to its sales showrooms continued to drop in August.

China Resources Land was one of the few developers that posted a rise in profit in the first half. Its net profit rose 30% from a year earlier.

(Reporting by Clare Jim; Editing by Tomasz Janowski, Andy Sullivan and Nick Macfie)