Not all creditors are on board with debt extensions, however. Some have been pushing for defaults. Going forward, the developer has to work harder and create a positive narrative.

Second, with over 3000 projects nationwide, Country Garden’s Achilles’ heel is delivering homes that have already been sold.

As of the end of 2022, among its roughly $US200 billion of debt, close to half were contract liabilities, or pre-sales deposits it received from homebuyers. The rest was split roughly between account payables, including commercial acceptance bills and interest-bearing debt.

Once the pre-sales problem is resolved, the debt pile doesn’t look particularly large, especially compared to Evergrande, where about one-quarter of liabilities is in interest-bearing debt.

Construction costs are by far the biggest expense that Country Garden incurs — an estimated 160 billion yuan this year, according to JPMorgan Chase & Co. Based on the company’s own stress test conducted a year ago, it needs about 28 billion yuan to 30 billion yuan in monthly sales just to generate enough cash to be able to finish pre-sold projects.

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It has not hit this important threshold so far in 2023. In other words, it has been bleeding cash delivering pre-sold homes.

Does it still make business sense to finish projects in cities plagued by population outflow and oversupply? Country Garden has a formidable sales operation.

Last year, it had a respectable 65 per cent sell-through rate (new homes sold as a percentage of units being offered), despite the property downturn. Nonetheless, not every apartment in a new project gets bought — and some may not be for a long time to come. As of the end of 2022, unsold units under construction account for about 10 per cent of Country Garden’s land bank.

Of course, the developer must deliver pre-sold homes — the alternative would not be politically viable. However, just like with its creditors, it should negotiate with homebuyers, too. What about abandoning some sites and giving buyers nicer, finished apartments in a better part of town? Or returning deposits — plus a penalty — to those who bought from projects with dismal sales?

To survive, one thing is for certain: The developer has to scale back. It needs to buy time, while negotiating with all players with skin in the game. Unsold, undeveloped projects must be offloaded to asset managers, while some sold, unfinished homes need to be scrapped without angering consumers. It will be a true test of Country Garden’s operational strength.

Bloomberg

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