Chinese developer Country Garden Holdings Co offered the strongest indication yet that it’s set for a maiden default and debt restructuring, in the latest sign that authorities’ rescue efforts are far from enough to stop the nation’s property crisis from worsening.

China’s former top builder warned in a stock exchange filing on Tuesday that it will not be able to meet all of its future offshore payment obligations, including dollar bonds. Such non-payment may lead to relevant creditors demanding acceleration of payment or pursuing enforcement action, it added. 

Country Garden’s warning came after it managed to dodge its first public bond payment failure and succeeded in rescheduling local debt in recent months, shifting investors’ focus from increasingly inevitable delinquencies towards a likely massive debt overhaul. With its peer China Evergrande Group facing rising risk of liquidation amid uncertainties about its own restructuring, the developer’s deepening woes underscore the need for Beijing to adopt stronger measures to support a key growth engine as homes sales keep slumping.  

Country Garden’s latest statement “may pressure the offshore bondholders to approve any upcoming restructuring proposal”, said Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group. “The company is clearly still in a liquidity crunch with many unfinished projects to complete and limited access to new financing.”

In a reflection of how Country Garden’s debt woes are affecting prospective homebuyers’ confidence in the builder, the company said on Tuesday that September contracted sales plunged 81% from a year earlier. Declines have been accelerating in recent months, with August’s 72% drop following decreases in excess of 50% in June and July.

Subdued home sales are further squeezing the breathing room of Chinese distressed developers like Country Garden despite that the central government have rolled out a slew of measures, including an easing of mortgage restrictions at the end of August triggered a spurt of home sales in larger cities, to prop up the property market this year.

More evidence keeps emerging of persistently depressed demand. Daily sales of new homes during the recent eight-day Golden Week holiday declined 17% from last year, according to data on 35 major cities tracked by China Index Holdings Ltd.

Country Garden’s shares fell 11% in Hong Kong on Tuesday, following a 6.7% drop in the previous session. A Bloomberg Intelligence gauge of Chinese property stocks also slid 2% on Tuesday.  

Country Garden, which has become a symbol of China’s broader property debt crisis, said that it had not made a due payment in the amount of HK$470 million (RM283.5 million) “under certain of its indebtedness”. The company missed initial deadlines last month to pay US$55.4 million (RM261.75 million) of interest on two dollar bonds, and grace periods are respectively set to end on Oct 17-18 and Oct 27. It has US$11 billion of offshore notes outstanding, according to data compiled by Bloomberg. 

Once China’s largest developer, Country Garden has been engulfed in a broader property debt crisis and warned on Aug 30 that it may default. 

Fresh concerns about financial market contagion from China’s property sector flared in August, when the firm failed to pay interest on two dollar bonds by an initial deadline. While Country Garden went on to meet those obligations within a grace period, it subsequently missed more initial deadlines and hadn’t commented publicly on prospects for honouring those debts before Tuesday. 

Helmed by one of China’s richest women, Yang Huiyan, the builder is important to the nation’s economy due to its sheer size. Country Garden has more than 3,000 housing projects in smaller cities and about 70,000 employees. As such, turmoil at the firm could lead to a worse impact than from 2021’s debt failure at distressed peer China Evergrande Group given it has four times the number of projects. 

Distress runs deep at Country Garden, one of the world’s most heavily indebted developers with 1.36 trillion yuan (RM892.64 billion) of total liabilities. Its dollar bonds are indicated in a range of five to seven cents, indicating how little holders expect to recover in any eventual restructuring.

ANZ’s Meng said the firm’s base case is that the Country Garden dollar-bond coupons that were initially due last month will get paid during the grace periods. They entail US$40 million of interest on a 2024 bond that was due on Sept 27 and US$15.4 million that was effectively due on Sept 18 on a 2025 note, according to Bloomberg-compiled data. 

There’s questions about when the 30-day grace period ends on the 2025 bond before a default could be declared. That is because the interest date fell on a Sunday, and when that happens for bond issuers the effective due date becomes the next business day. Similar uncertainty surrounded when exactly the grace periods ended for the coupons Country Garden didn’t pay on time in August. 

As for bonds maturing in coming months, notably the US$1 billion 2024 note in January and a HK$3 billion bond this December, Meng said Country Garden “will need to negotiate with bondholders for an offshore-debt restructuring plan”.

In addition to the two dollar-bond coupons in grace periods, Country Garden has six other such notes with interest due in the fourth quarter. Those six coupons are a combined US$116 million, Bloomberg-compiled data show.

Country Garden also said on Tuesday it hired advisers, a step that distressed companies often take as they gear up to seek a broader debt restructuring. 

It has engaged China International Capital Corporation (CICC) Hong Kong Securities Ltd and Houlihan Lokey (China) Ltd as joint financial advisers and Sidley Austin as legal adviser. 

They will “evaluate the capital structure and liquidity of the group and formulate a holistic solution”, the developer said. People familiar with the matter said late last month that Country Garden was in talks with Houlihan Lokey and CICC for both to become financial advisers and put together an offshore-debt restructuring plan.

Meanwhile, creditors of Country Garden have been in discussions with several financial advisers who are separately seeking to form an ad-hoc group ahead of a possible restructuring. PJT Partners Inc and Moelis & Co have been talking with various creditors, people involved in the private conversations said earlier this week. No decisions have been made by creditors, the people added.