Aly Song/Reuters
- Property giant Country Garden has had a bad week. It missed interest payments and issued a profit warning.
- The warning is a "prelude to an ultimate credit event," paving the way for debt restructuring, per JPMorgan.
- Concerns about a restructuring started swirling after local outlet Yicai reported this process could begin soon.
Embattled Chinese property developer Country Garden may be preparing to enter a debt restructuring, JPMorgan Chase analysts wrote in a Friday note seen by Insider.
Country Garden racked up 1.4 trillion Chinese yuan, or almost $200 billion, in liabilities at the end of 2022. It also faces 7.8 billion Chinese yuan, or $1.1 billion, in payments for notes and bonds in September.
JPMorgan's assessment came after the property developer issued a profit warning on Thursday. The real-estate giant expects to record a net loss between 45 billion to 55 billion yuan for the first half of 2023 due to "severe difficulties and challenges" for the property market since 2021.
To contextualize the profit warning, Country Garden reported a net loss of 6.1 billion yuan in 2022 amid a property crisis in China. It was the company's first full-year loss since its 2007 listing in Hong Kong.
While the expected net loss isn't a surprise, "what's more important is management admitting that CG is facing serious difficulties," wrote a group of JPMorgan analysts led by Karl Chan, the bank's head of research for China property equity.
"We think this is likely the prelude to an ultimate credit event, and the company might already be in preparation for debt restructuring," the JPMorgan analysts wrote.
JPMorgan's assessment came amid Chinese financial media outlet Yicai reporting Friday that Country Garden hired China International Capital Corporation, or CICC, to soon lead a debt restructuring. The news has been picked up by various media outlets including Reuters.
Another analyst feels Country Garden could restructure if it's unable to raise cash in time.
Country Garden's liquidity position is "very stretched," with dollar coupon payments scheduled every month for the remainder of this year, Nicholas Chen, CreditInsights' analyst for Chinese corporates, told Insider.
The developer is likely to raise cash in various ways, including selling its assets and injecting shareholders' funds but "should these be insufficient, Country Garden would likely default and enter into a comprehensive debt restructuring," Chen added.
Country Garden is the latest high-profile Chinese real-estate giant to face a liquidity crunch in two years as China's economy struggles to recover following the COVID-19 pandemic.
The drama at the private developer is renewing contagion fears that trouble in the world's second-largest economy could spill over to other sectors in the country and globally.
However, Beijing is likely to "defend the line" between privately owned and state-owned enterprises to prevent a spillover effect, Iris Chen, an analyst at Nomura, wrote in a Thursday note. Privately owned enterprises "will be on their own, and their upcoming maturities will be key to evaluating their survival possibility," Chen added.
Country Garden's bondholders, meanwhile, are watching if Country Garden's chair, Yang Huiyan, will use her vast fortune to pump money into the company which is currently facing a liquidity crisis, according to a Bloomberg report on Friday.
Country Garden closed 6% lower at 98 Hong Kong cents, or 13 cents, apiece after hitting a record low of 89 Hong Kong cents on Friday. They are 63% lower so far this year.
Country Garden and CICC did not immediately respond to requests from Insider for comment.