Country Garden (HKG: 2007) shares are up in Hong Kong today. This will strike some as surprising for Country Garden has just defaulted on a bond payment. Well, OK, $15 million or so isn’t very much - but if a company that size can’t pay $15 million on time then things are bad, right? The legal issue here is not that it’s just late paying, Country Garden is also outside the 30 day grace period. This puts all foreign (ie, US dollar mostly) debt into technical default as well.
So, why on Earth has the equity price risen on the back of this news? Because this was all well known and financial markets react to new news, not old news - news not olds perhaps.
We had the international press telling us that the default was likely. When Reuters broadcasts it it’s not exactly a secret. The WSJ was telling us a week back it was likely to happen. This simply isn’t news. As we’ve also been saying about Country Garden: “The basic background here is that the bond prices are shrieking that Country Garden (both versions) is bust. One day just recently the $ bonds were trading at 20% of par. That’s not just akin to Chapter 11 value (not that China calls it that but…) that’s below the usual sort of range we’d expect in a Chapter 7, or liquidation. Yes, there’s muttering that one of the onshore bonds is being paid early. But that’s onshore.”
If a bond’s trading at 20% of par then everyone’s really very convinced indeed that it’s going to default. For the bet there is that there will be some recovery of capital, maybe, but pretty certainly no interest in the meantime.
Country Garden share price from Google Finance
As we’ve also said about Country Garden: “Country Garden Holdings (HKG: 2007) (OTCPK: CTRYF) shares are down by 17% again. 2007 shares dropped as a a result of fairly doom laden news released over the weekend - that certain bonds would be suspended from trading. The important point here is that these are domestic bonds. If we were to be unkind about the Chinese financial markets we’d suggest that foreigners losing money is not something that anyone internally worries about very much. But people within the country, on the Mainland? That then becomes a more important problem. So, there were a couple of missed coupon payments on international dollar bonds last week.”
As we can also put this, this is the slow part of going bust (in Hemmingway’s phrase). It’s been going on for some months and will likely do so for some to many more. Which is why the equity is up on this story of the default on the international bonds. Yes, we already knew that, it’s already in the price. It’s *new* information that will change the price, not old.
