Inside Yang Guoqiang's struggle with Country Garden's debt woes

At least two of the bondholders have reached Country Garden seeking urgent talks to discuss a potential debt restructuring plan.

Inside Yang Guoqiang's struggle with Country Garden's debt woes
Country Garden Holdings' Yeung Kwok Keung at a news conference in Hong Kong, China March 20, 2018. REUTERS/Bobby Yip/File Photo

The backstory: Yang Guoqiang is the founder and former chairman of Country Garden, one of China's major property companies. He founded the company in 1992, and it quickly became a real estate powerhouse in China, known for its "five-star living" ads and affordable villas. Yang was not only a business leader but also a philanthropist, donating approximately US$1.37 billion to education and poverty relief. The company's modus operandi involved acquiring land from local governments and transforming it into massive developments that boosted local economies. 

But since late 2021, China's property market has been turbulent. Defaults have become increasingly common, leaving homes unfinished and creditors at a loss. This is a big concern because China's real estate sector plays a pivotal role in the country's economy, contributing up to 30% of its GDP.

As for China's broader economic picture, the third quarter saw growth of 4.9%, which, while positive, is slower than the 6.3% growth in the previous quarter. But when it comes to property investment in China, it saw a drop of 9.1% during the first nine months of this year.

More recently: Yang passed on the chairman's position to his daughter, Yang Huiyan, in March, but he remains involved as a special adviser and is still a big influence in the company.

As the debt crisis deepened, Yang has taken measures to address the issue. He resorted to unique strategies, like screening a wartime movie during a meeting with senior managers to emphasize the need for unity in confronting the debt crisis. Yang also personally lent the company US$300 million with no interest attached. He even tried to sell off his private jets to inject much-needed funds. Country Garden's debt now stands at about US$11 billion, with an additional US$6 billion in onshore loans within China. If it can't sort things out, it could lead to one of the biggest debt restructurings in China's history. 

Last month, Country Garden made headlines when it missed an initial deadline for a crucial US$15 million coupon payment, raising concerns of a potential default on foreign debts. This triggered a 30-day grace period for the company to get its affairs in order. It’s been grappling with mounting debts and insufficient cash for a while. Notably, the firm reported a loss of US$6.7 billion for the first half of the year.

The development: Wednesday was the deadline for the grace period given for the repayment of the US$15 million coupon payment that Country Garden had missed in September, but sources close to the matter say that the payment did not make it to the bondholders. Now, at least two of the bondholders have reached Country Garden seeking urgent talks to discuss a potential debt restructuring plan. Moody’s has also said it could downgrade Country Garden’s rating if its recovery prospects get worse. Its senior unsecured rating of C is already at the lowest of its rating scale. 

Rumors began swirling after the news that Yang and his daughter had fled China amid all the financial pressure. But Country Garden took to WeChat on Thursday to deny these rumors, saying that both were “working as normal” in mainland China and the rumors were having “adverse effects.” 

Key comments: 

"The property weakness needs to be monitored, which requires more policy support. Further relaxation of property curbs can be expected, but the effects might take a bit longer time to materialize," said Zhou Hao, Economist at Guotai Junan International.

“If Country Garden, the biggest privately owned developer in China, goes down, that could trigger a crisis in confidence for the property sector,” said Edward Moya, a senior market analyst for Oanda.

"The company will actively consider taking various countermeasures to ensure the security of cash flow," said Country Garden in an exchange filing on July 31. "Meanwhile, it will actively seek guidance and support from the government and regulatory authorities."