By Fiona Law

Fears are mounting that a troubled Chinese real-estate developer is to become the first ever to default on an offshore bond, sending other property bonds tumbling and hitting global investors who had gorged on this debt.

Kaisa Group Holdings Ltd. has already defaulted on a loan to HSBC Holdings PLC and on Thursday is due to make a regular interest payment on a bond due to mature in 2020. Money managers are losing confidence that it will pay, with the price of that debt crumbling to around 25-30 cents on the dollar Wednesday after the company in a statement denied a local press report that its board had decided to wind up the company and restructure.

The potential default is likely to add further pressure on China's heavily indebted property sector, already struggling with a weak housing market and difficulties in raising cash to pay back loans. The property bonds had been one of the world's hottest investments because of the high yields on offer and a belief that any Chinese borrower running into trouble would be kept afloat by bailouts or debt extensions.

But the mood has changed as worries grow over the impact of China's economic slowdown, and the rising amount of debt among local government-connected financing vehicles as well as among some Chinese companies like real-estate companies.

Chinese offshore property debt outstanding amounts to $55.7 billion, according to Dealogic, and accounts for roughly half the high-yield borrowers in Asia outside of Japan.

That means funds that track Asian high-yield indexes are compelled to buy China property bonds. The yield on the benchmark J.P. Morgan Asia Credit Index for high-yield corporates jumped 0.35 percentage point to 7.75%, the highest borrowing cost since March last year.

"The Kaisa saga is a series of unfortunate events. The weak sentiments in the offshore China property sector will linger," said Veronica Ng, bond portfolio manager at Lion Global Investors, which manages $25.5 billion in assets. Lion Global used to own some of Kaisa's bonds, according to Thomson Reuters. But it is no longer a bondholder now, according to its spokesperson.

"There are still uncertainties surrounding the company, not to mention the sharp fall in its bond prices," said Mark Reade, Asian fixed-income analyst at Mizuho Securities Asia Ltd. "Investors are likely to approach the broader sector with some caution and demand higher risk premiums going forward."

Efforts to seek comments from Kaisa were unsuccessful.

Contagion from Kaisa's troubles is spreading with other midsize Chinese property developers like Agile Property Holdings Ltd., KWG and Country Garden seeing their bonds slide since the start of this year, sending yields to as high as 13%, compared with single digits last year. Kaisa's bonds currently yield in a range from 48% to 92%. Bond yields rise as prices fall.

Issuance of new bonds by these property companies is drying up as investors shy away and switch into safer government bonds around Asia.

"January traditionally is a busy month for property firms to issue bonds. But a lot of these companies are waiting and trying to find out what happened with Kaisa," said Paul Au, head of debt syndicate at UBS AG. "Next few weeks are going to be tough issuance."

It isn't the first time investors' nerves have been shaken in China, with onetime solar-power giant Suntech Power Holdings Co. defaulting on its overseas debt in 2013, while solar-equipment maker Shanghai Chaori Solar Energy Science & Technology Co. made the country's first domestic default case last year.

Investors are focused now on whether Kaisa will pay the around $25 million in interest payments due Thursday for one of its offshore bonds. The company said Tuesday its two project partners demanded a 1.2 billion yuan ($193 million) refund after Kaisa defaulted on a $51.6 million loan from HSBC, which could trigger other creditors to demand loan repayments too.

Rating agency Moody's Investors Service last week downgraded the company's credit ratings to Caa3 from B3. Standard & Poor's on Tuesday reduced it to "selective default," reckoning Kaisa likely to "default on its upcoming obligations". The market value of the Hong Kong-listed company has halved since trouble started to unfold a month ago, and its stock was suspended from trading ahead of Christmas Day.

Some analysts say the company has the funds but is choosing to avoid paying offshore investors to preserve cash, as they rank behind domestic creditors in getting access to a Chinese company's assets onshore. The country restricts free flow of capital across the border.

Deutsche Bank believes the company has "a lack of willingness to pay," given Kaisa has $9 billion in unrestricted cash. Kaisa has total debt of $5 billion, according to Deutsche Bank, including $2.5 billion offshore.

Kaisa's Chairman Kwok Ying Shing resigned in early December, followed by the departure of a number of senior officials at the company, including its chief financial officer, vice chairman and the chairman's brother, Kwok Ying Chi. Sales at many of its residential- and commercial-property projects in the southern Chinese town of Shenzhen, where it is based, had been blocked by the local government as early as late November. The company hasn't explained why senior officials left and why projects were stalled.

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