Country Garden becomes ‘fallen angel’ with downgrade to junk

HONG KONG (BLOOMBERG) – Moody’s Investors Service lowered Country Garden Holdings from investment-grade territory, the latest sign of how sentiment has soured for private-sector Chinese developers during the industry’s cash crunch and sales slump.

The country’s largest builder by sales was downgraded one notch to Ba1, and Moody’s ratings outlook is negative. The company on Wednesday (June 22) cited Country Garden’s “declining property sales and deteriorating financial metrics”, as well as weakened access to long-term funding.

It is Country Garden’s second junk-level rating from major international credit assessors. S&P Global Ratings has not deemed the developer investment grade since 2008, according to data compiled by Bloomberg.

Fitch Ratings raised Country Garden to investment-grade territory in 2017, but put the company on watch for downgrade back to junk in June.

Meanwhile, Wednesday saw other builders, including Greenland Holding Group and Guangzhou R&F Properties, receive downgrades.

Bond defaults since late last year by China Evergrande Group and Sunac China Holdings, which had been among the country’s biggest developers, highlighted the reach of the sector’s debt crisis.

Dropping new-home sales for nearly a year have added to liquidity pressures from a government crackdown on additional leverage growth by property companies.

The recent price plunge for conglomerate Fosun International’s notes signals financial stress is shifting from builders to other weaker borrowers.

Despite Country Garden’s size – its US$81 billion (S$112 billion) of revenue last year was nearly triple that of America’s largest home builder, DR Horton – the Chinese company’s dollar bonds have had several bouts of sharp price declines even while being seen as a sector bulwark.

The company employs more than 200,000 people and has operations throughout China.

Country Garden announced on Thursday it will repurchase US$411 million of notes that mature July 25 through a tender offer launched last week.

Falling out of investment-grade territory could result in Country Garden facing higher borrowing costs and some investors being forced to sell the company’s dollar bonds. Nearly all of the company’s such debt is below 70 cents on the dollar, generally considered stressed levels.

However, that is well above the 30 cents or less that many other developers’ offshore notes have slumped to.

Investors in China’s dollar-bond market have not relied on credit ratings for a long time, according to Mr Abhishek Rawat, portfolio manager at Hong Kong Asset Management. “The market is looking at whether a company is a true (state-owned enterprise) or non state-owned enterprise,” he said.