Credit default swap contracts have triggered on troubled Chinese property developer Country Garden Holdings, an industry body has ruled, paving the way for what could be substantial payments to protection holders.
The Credit Derivatives Determinations Committee, a group of banks and investment funds that rule on CDS market matters, voted unanimously on Wednesday that a so-called failure-to-pay credit event had occurred on CoGard's CDS contracts earlier this month after it missed an interest payment on one of its US$11bn of offshore bonds. (The result of the Committee meeting was first published online on Thursday.)
CoGard is the latest in a string of CDS triggers linked to Chinese property developers in recent years, including Shimao Group Holdings and Sunac China Holdings. There haven’t been enough derivatives trades linked to any of these other companies to meet the requirements to hold a CDS auction – the standard mechanism used to determine CDS payouts across the market – forcing protection holders to settle their trades bilaterally.
Recent data suggest there also may not be sufficient CoGard CDS trades to hold an auction despite the company's position as one of China’s largest property developers. There were 10 CDS contracts worth US$26.5m in net notional outstanding referencing CoGard as of mid-June, according to the Depository Trust and Clearing Corp, which collects derivatives market data. IFR could not immediately establish how many CoGard CDS contracts are in existence currently.
Committee rules stipulate that there must be at least 300 CDS transactions along with five dealers willing to participate in an auction for one to take place. Noble Group was the last company in the Asia ex-Japan region to meet these criteria after the commodity trader defaulted on its debt in 2018. The 12 members of the Asia ex-Japan Committee are due to meet on October 30 to discuss how to settle CoGard's CDS transactions.
CDS holders will still be compensated if they are able to settle their derivatives contracts physically. That involves delivering to their trading counterparty CoGard bonds with a face value equal to the amount of CDS protection they have purchased. In return, they should receive a payment equal to the value of that CDS protection.
CoGard’s April 2026 bonds currently trade at around 5% of face value. That implies CDS holders will recoup about 95 cents for every dollar of protection they bought on CoGard’s offshore bonds.
CoGard’s rapid descent into debt default is the latest sign of the significant troubles brewing in China’s real estate market. Once China’s largest property developer, CoGard has foundered this year as defaults have picked up in these markets. The company has US$187bn in total debt and has been looking to restructure its offshore bonds after struggling to make interest payments in recent months.