By Fiona Law

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

Kaisa Group Holdings Ltd. has already defaulted on a loan to HSBC Holdings PLC. Thursday, it is scheduled to make a regular interest payment on a bond due to mature in 2020.

Money managers are losing confidence that it will pay. Wednesday, the price of that debt was at around 25-30 cents on the dollar after the company issued a statement denying a local press report that its board had decided to wind up the company and restructure. Kaisa's bond prices have plunged more than 80% since the end of November.

Efforts to seek comments from Kaisa were unsuccessful.

The potential for a default is adding to the pressure on China's heavily indebted property sector, which already is 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.

Now, the mood has changed. Worries are mounting 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 businesses, such as 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 focus on Asian high-yield debt are compelled to buy China property bonds. The yield on the benchmark J.P. Morgan Asia Credit Index for high-yield companies 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 Kaisa bonds, according to Thomson Reuters, but it is no longer a bondholder, according to a Lion 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."

The prices of debt issued by other midsize Chinese property developers, such as Agile Property Holdings Ltd., KWG and Country Garden, has fallen 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 syndication 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. Suntech Power Holdings Co., a solar-power company, defaulted on its overseas debt in 2013. Last year, Shanghai Chaori Solar Energy Science & Technology Co. became the first company to default on domestic Chinese bonds.

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

Last week, Moody's Investors Service downgraded Kaisa's credit rating to Caa3 from B3. Standard & Poor's on Tuesday reduced its rating to "selective default," saying Kaisa is 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. The stock was suspended from trading ahead of Christmas Day.

Deutsche Bank AG said in a research note it believes the company has "a lack of willingness to pay," given Kaisa has 9 billion yuan ($1.4 billion) in unrestricted cash, according to the bank. 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, and a number of senior officials at the company, including its chief financial officer, vice chairman and the chairman's brother, Kwok Ying Chi, departed soon afterward. Sales at many of its residential- and commercial-property projects in the southern city of Shenzhen, where it is based, have been blocked by the local government. Some projects have been held up since late November. The company hasn't explained why the senior officials left and why the projects were stalled.

Corrections & Amplifications

Kaisa has 9 billion yuan ($1.4 billion) in unrestricted cash, according to Deutsche Bank AG. An earlier version of this article said Kaisa has $9 billion in unrestricted cash. (Jan. 7, 2015)

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