In a recent blow to Chinese developer Country Garden Holdings, research company GimmeCredit downgraded the company's bonds from stable to deteriorating. Analyst Cedric Rimaud expressed concerns about Country Garden's downward spiral and the low cash prices at which its bonds are currently trading. Rimaud emphasized the importance of support from the company's controlling shareholder and the government to keep the business afloat. However, he noted that the market dynamics remain weak and that Country Garden will continue to struggle until the Chinese property market shows signs of recovery.
GimmeCredit's downgrade follows their publication of a note titled "Imminent default," which also warned of forthcoming trouble. The U.S. dollar bonds have now reached deeply distressed levels, trading at cents on the dollar after Country Garden announced the suspension of trading for at least 10 onshore bonds to Hong Kong's regulator. The company had previously projected a potential loss of up to RMB55 billion ($7.62 billion) for the first half of the year and recently missed interest payments worth $22.5 million on debt with a face value of $1 billion.
As a result, Moody's Investors Service further downgraded Country Garden's rating into junk-bond territory and raised concerns about potential contagion across China's heavily indebted property market. This latest default adds to a growing list, following China Evergrande Group's defaults in the last two years.
In response to these events, Morgan Stanley downgraded the equity and reduced its share price target by 69%.
Distressed Debt Funds Drive Bond Buying
According to data-as-a-service company BondCliQ Media Services, distressed debt funds have been actively buying bonds since Monday, resulting in higher prices. The most significant increase is seen in the 8% notes that mature in 2027, which are now trading above 10 cents on the dollar.
Net Buying Trend
Over the past 10 days, there has been consistent net buying of the most active bond issues. The following chart illustrates this trend, with approximately 60/40 better net buyers accounting for about $36 million in total volume by midmorning Wednesday.
Uncertain Future for Country Garden
Despite the potential support from Country Garden's controlling shareholder, Yang Huiyan, who has amassed a significant fortune since the company's establishment in 1992, a default might still be on the horizon. Rimaud, an industry expert, expressed concerns regarding the company this week.
Nomura's research indicates that Country Garden currently has nearly 1 million incomplete homes. The company has achieved rapid growth by acquiring substantial plots of land from local governments and transforming them into various properties such as hotels, shops, schools, and tech parks.
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