Country Garden Sells Stock as Liquidity Worsens for Builders 

2022-07-27 04:50:30.100 GMT

By John Cheng

(Bloomberg) -- Country Garden Holdings Co. is looking to raise about HK$2.83 billion ($361 million) selling new shares at a discount, highlighting the sense of urgency among Chinese property developers to raise cash amid an industry-wide liquidity crunch.  

The country’s largest developer by sales is offering 870 million shares at HK$3.25 apiece, according to a filing to the Hong Kong Stock Exchange Wednesday. That represents a discount of 12.6% to Tuesday’s share closing price.  Country Garden’s shares plunged as much as 15%, as investors priced in the dilution effect of the additional share sale.

Its dollar bonds initially jumped as the company said it will use part of the proceeds to repay offshore debt, before losing some of the gains toward midday.   

The placement “shows its desperation for cash amid weakening liquidity” while negative factors including rising delivery costs of presold homes, slowing contracted sales and challenges in selling bonds onshore are hurting its cash flows, Bloomberg Intelligence analysts including Kristy Hung wrote in a note.

Markets are still indicating concerns about the developer’s repayment risks, with its dollar bonds still in distressed territory after it was downgraded by rating firms into junk territory from investment-grade status earlier this year. While stocks and bonds of Chinese real estate firms have risen sharply recently amid signs of growing state support for a struggling housing sector, many observers say a longer-term rebound in home sales is necessary to sustain any market rally.

The Guangdong province-based developer had initially offered 840 million shares at the same price, according to terms of the deal obtained by Bloomberg News. Proceeds of the share sales will be used for repaying offshore debts, general working capital and future development purposes, according to the filing. In an emailed statement, Country Garden said the share sale will help it buy back bonds both onshore and offshore, further reducing its debt pile. The last share placement conducted by a Chinese developer was a relatively small one by Times China Holdings Ltd. in late January. 

In a stunning reversal for a developer that was until recently considered one of China’s safer private-sector builders, Country Garden has fallen to distressed levels in credit markets in recent months. Its 6.5% dollar bond due 2024 fell to a record low of about 33 cents last week from near par at the start of this year, before rebounding to 42.6 cents Wednesday. 

Its shares are down more than 50% this year despite an 18% surge earlier this week.

Country Garden’s debt woes and rating slide into the junk category earlier this year formed part of a watershed moment in China’s credit market, when financial stress began spreading from weaker developers to once healthy-looking peers and state-backed builders.  

Stocks and bonds of builders rallied earlier this week, following a report that authorities will set up a special fund to help developers and a match-making meeting between builders and financial institutions. 

Country Garden’s share sale plan “aligns with the company’s direction to explore various financing channels,” said Shu Hui Woon, credit analyst at Lucror Analytics. “The use of funds to repay offshore indebtedness will provide assurance for offshore noteholders especially when most developers prioritize onshore payment.” 

The developer has 36.6 billion yuan of domestic bonds and $10.5 billion of dollar notes outstanding, Bloomberg-compiled data show. 

--With assistance from Dorothy Ma and Emma Dong.