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China Averts Moral Hazard, for Now, After Country Garden Pays

(Bloomberg) -- A Chinese program to backstop distressed developers’ debt dodged its first potential intervention after Country Garden Holdings Co. paid bond interest, averting the moral hazard that such support may fuel.

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The distressed developer paid interest totaling 65.95 million yuan ($9.1 million) on its 3.95% note and 3.8% bond, according to company filings. The coupon payments were made despite Country Garden saying in a statement on May 9 that it couldn’t meet initial deadlines that day, and that a guarantor would step in if it couldn’t pay within three days. Both notes are guaranteed by state-owned firm China Bond Insurance Co.

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The payments raise questions about the outcome of talks between China Bond Insurance and Country Garden, given speculation that the guarantor would likely push issuers first to pay under the guarantee program to avoid raising moral hazard issues. Any nonpayment in this program could open the door to more distressed borrowers not paying as they wouldn’t want to be seen being selective about which debts to pay.

“We cannot rule out the possibility that Country Garden might have been pressured by the regulator to cough up the cash for the coupon payment rather than triggering the payment clause under the bond guarantee program,” said Zerlina Zeng, senior credit analyst at Creditsights Inc.

China Bond Insurance may have been possibly concerned that a failed payment by Country Garden “would reduce the willingness of other developers that are covered under the bond guarantee program,” she said.

China Bond Insurance and Country Garden didn’t immediately respond to Bloomberg’s requests for comments.

Once China’s largest developer by sales, Country Garden has been hit hard by the property crisis and now is saddled with 1.36 trillion yuan of total liabilities, according to its unaudited 2023 interim results. The Foshan-based company reported contracted sales for April of 3.9 billion yuan, compared with 22.7 billion yuan in the same period last year.

China Bond Insurance is at the heart of a program introduced by authorities in 2022 to help private-sector developers struggling with the country’s property-debt crisis avoid liquidity crunches.

So far at least 33 bonds have been issued under the program, with 33.7 billion yuan raised in total, according to data compiled by Bloomberg. No coupon payments have been missed on other bonds guaranteed under the program.

Some developers that have issued notes via the program, such as CIFI Holdings Group Co., have defaulted on other bonds, but not those guaranteed by China Bond Insurance.

--With assistance from Emma Dong and Shuiyu Jing.

(Updates with analyst comment, background throughout.)

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