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Country Garden's Decisive Legal Battle Signals Crossroads for China Real Estate


Benjamin Hughes

May 16, 2024 - 21:37 pm


Country Garden Holdings Faces Landmark Court Showdown in Hong Kong

(Bloomberg) — Country Garden Holdings Co., a leading property developer, is gearing up for a pivotal legal confrontation in a Hong Kong courtroom. On Friday, the real estate giant will go head-to-head with a seeking creditor demanding the company's liquidation following a default. This notable courtroom clash represents a critical junction for the Chinese developer amidst its significant financial strife.

The upcoming hearing is a decisive moment for Country Garden as it presents its strategies for managing debt commitments for the first time. This comes three months subsequent to a winding-up petition filed by a creditor, affiliated with Kingboard Holdings Ltd., a manufacturer of laminate materials. The creditor has accused Country Garden of neglecting to fulfill payments on a term loan valued at the equivalent of around HK$1.6 billion ($205 million), and accrued interest, disclosure found in an exchange filing suggests.

The principal purpose of the wind-up petition is to expedite debt restructuring for the beleaguered company, compelling it to devise a repayment strategy through direct negotiations with its creditors. This could be an extended ordeal for Country Garden. The negotiations are expected to involve a spectrum of creditors, including bank lenders and bondholders, due to the developer's considerable syndicated loans and bonds. Smaller lending institutions are also enveloped in the discussions, including the very entity that unveiled the lawsuit, adding an extra dimension of intricacy to the proceedings.

Should the judiciary rule unfavorably for Country Garden, it would be an ignominious slide for a company that once reigned as China's premiere developer by sales volume. The predicament faced by Country Garden is unparalleled among peers of its magnitude since China Evergrande Group became the subject of a liquidation order from a Hong Kong court at the start of this year. It is well-documented that Country Garden suffered a default last October, under the weight of liabilities totaling 1.36 trillion yuan as reported in its unaudited interim results for 2023. Nevertheless, the developer has laboriously sought to avert defaults on domestically issued bonds and persists in the delivery of residential homes to maintain business continuity.

The urgency is escalating, made evident by a recent near-failure to meet local debt obligations. The developer faltered at meeting the initial deadlines on May 9 for interest payments amounting to 65.95 million yuan on both the 3.95% note and the 3.8% bond. The company did, however, fulfill these obligations within the grace period allowed of several days. Notably, the bonds in question were backed by China Bond Insurance Co., a state-owned enterprise.

The enduring challenges within the property sector have prodded the Chinese government to hasten the deployment of supportive measures. According to proposals currently under the State Council's review, there lies a possibility for local governments to acquire unsold inventory from developers in distress at substantially reduced prices, funded through loans from state banks. Consequently, such initiatives have seen a buoyancy in China's high-yield, or "junk," dollar bonds—now at their zenith in a three-year period. However, it's also clear that notes from certain developers continue to trade at severely depressed values.

In reaction to its fiscal predicacies, Country Garden engaged KPMG Advisory (China) Ltd. as its main financial adviser tasked with its offshore liability restructuring as early as January. More recently, the firm has secured the services of Linklaters LLP as its legal adviser in the past month. On the creditor side, a prominent assembly of Country Garden's creditors nominated PJT Partners Inc. for financial guidance, while appointing Kirkland & Ellis LLP for legal counsel in January, as reported earlier by Bloomberg.

During a recent monthly management meeting, Yang Huiyan, the chairperson of Country Garden, struck a note of cautious optimism. Though she acknowledged the persisting headwinds in the property sector, she pointed to an increasingly supportive policy environment fostered by the government. Yang emphasized her belief that with resilience, Country Garden will be able to weather the storm and eventually "embrace the spring."

This court case exemplifies the turmoil in China's once-booming real estate sector, underscoring the broader economic challenges faced by the world's second-largest economy. The outcome of Friday's proceedings will not only shape the future path of a key player in the Chinese property market but also may signal the level of the government's inclination to intercede on behalf of large, distressed developers.

Country Garden's Legal Battle

As the countdown to the court date ensues, stakeholders from all stations, small-scale lenders to individual homebuyers, remain on edge, keenly awaiting an outcome that will have wide implications. Country Garden's legal strategies and the court's decision could set precedents for how similar cases might unfold in the future as China grapples to stabilize its rocking property market and reassure international investors.

The fate of Country Garden—and possibly that of other beleaguered developers—lies in balance. A victory in the court could provide much-needed respite for the company and indicate a possible recovery trajectory for the broader sector. Conversely, a ruling to liquidate would not only seal the fate of the once-industry titan but could also unleash cascading effects throughout the financial markets, potentially impacting the broader health of China's economy.

For investors and market observers, the case also brings into sharp focus the intricate web of relationships between China's real estate developers, state-owned enterprises, and the government's regulatory framework. The intertwining financial commitments and the layered nature of the debt structures present a labyrinthine challenge for analysts trying to gauge the ripple effects of Country Garden's potential liquidation.

Further scrutiny of the developer's financials reveals a tightrope walk of managing significant debt while keeping operational engines turning. Sustaining trust among investors remains pivotal as Country Garden plots its route through these debt negotiations. The company's ability to uphold its bond commitments, particularly domestically, will be crucial in maintaining its stature and solvency in the eyes of stakeholders.

Analysts are tuned in to recognize any indications of the Chinese government's willingness to step in and buoy ailing developers, particularly those with extensive influence and impact on the economy like Country Garden. A clear stance from the authorities will significantly steer investor sentiment and could ignite a reassessment of the risk factors embedded in Chinese real estate investments.

Ultimately, the courtroom battle is a microcosm of the broader themes: the interplay of legal, financial, and governmental forces, each vying for stability amidst uncertainty. The verdict on Country Garden Holdings Co. on Friday will not only draw a line under one company's saga but will also send ripples across the market, potentially ushering in a new phase for the Chinese property sector.

In conclusion, the complexities of Country Garden's impending legal face-off in Hong Kong embody the fragility of China's real estate magnates and the sector's uncertain future. With creditors knocking and the court's decision looming, the once-dominant developer will either carve a path for redemption or become a sobering case study of industry volatility. As stakeholders and observers look on, the outcome will serve as a bellwether for the Chinese property market, where legal encounters, financial crises, and governmental policies intertwine and sculpt the narrative.

©2024 Bloomberg L.P.

For more details and updates on this case, visit Bloomberg.