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Country Garden debt crisis triggers push for payout on credit default swaps
A market participant has made a move to push for a payout on credit default swaps tied to Country Garden Holdings, following reports the Chinese developer missed a bond coupon payment last week.
www.scmp.com
The failure of Country Garden Holdings to pay a bond coupon has prompted an investor to start pushing for a payout on derivative financial contracts known as credit default swaps (CDS) linked to the troubled Chinese developer.
An undisclosed “eligible market participant” on Monday submitted a question to the Credit Derivatives Determinations Committees, the industry’s arbiter of credit events, whether the non-payment of US$15.4 million interest on a US$500 million note due 2025 constitutes a debt default.
No decision has been made as of Tuesday, according to data published by the secretariat, a unit under the New York-based International Swaps and Derivatives Association. The Asia ex-Japan determinations committee comprises nine global banks and three non-dealer members.
Country Garden did not pay the bond coupon after a 30-day grace period expired on October 18, according to media reports. The company has remained silent about it, and was later forced to deny online speculation that key members of the founding family had left the country.
A phone call to the company on Tuesday went unanswered. It did not immediately reply to an email from the Post seeking comment on the latest situation.
The developer, based in Foshan in southern Guangdong province, had warned investors that it was likely to skip payments of its offshore debts and hired outside advisers to help ease its cash crunch. A persistent slump in home sales, despite Beijing’s stimulus measures, has pushed the nation’s biggest developers to near collapse, saddling foreign investors with billions of dollars in losses.
Credit default swaps are contracts used by traders to hedge against non-payment by a government or company in case of severe financial distress or bankruptcy. Contracts tied to Country Garden’s creditworthiness have been among the most active reference entities.
On average, some US$769,231 notional value of contracts tied to the Chinese developer were traded per week in the six months through August 25, according to Depository Trust & Clearing Corp. In the preceding six months, a total of US$20 million of contracts changed hands.
The Asia ex-Japan determinations committee had previously made decisions related to credit events at Chinese developers, most recently involving the Sino-Ocean Group in September. Last year, it handed down decisions on Powerlong Real Estate, Shimao Group, Sunac China, Logan Group and Yuzhou Group.
Country Garden was China’s biggest home builder until 2021 when the industry began to slump. Along with Longfor Group and Midea Real Estate, the developers were deemed financially sound to issue bonds in a bid to boost sentiment in the sector. Credit mitigation warrants, China’s version of CDS, were also created to allow investors to hedge their bets.
Country Garden had about 118.5 billion yuan of foreign-currency debt on June 30, based on its latest financial report to shareholders. About US$557.5 million of offshore interest and principal maturities, as well as some US$1.75 billion of principal, will fall due by the end of this year, according to CreditSights, a US-based credit research company.
