A Chinese developer which sold a state-guaranteed onshore note in January has defaulted on its dollar bonds, raising doubts about the efficiency of state help for the troubled real estate sector.

KWG Group Holdings – which builds high-rise apartments, office buildings and shopping malls primarily in China’s larger cites – said it didn’t pay US$119 million of principal due on Sunday on a note, constituting a default. An event of default has also occurred under the company’s eight other dollar bonds, according to an exchange filing. 

Shares fell 12 per cent Monday in Hong Kong to a record low and some notes dropped below 10 cents.

The liquidity strains at KWG, which sold a 700 million yuan (S$134.7 million) note guaranteed by state-owned China Bond Insurance, illustrate ongoing difficulties for some developers at a time new-home sales are slowing anew. A small group of builders has issued such debt, and of them just CIFI Holdings Group later became a defaulter. 

KWG’s payment miss “could cast doubt on the government’s support of privately owned developers, especially for other marginally solvent names,” said Bloomberg Intelligence analyst Kristy Hung. “It does raise concerns on whether there could be more defaults to come.”

The default also highlights the restraints of maturity extensions, which buy time for developers to improve liquidity but often don’t address underlying balance-sheet issues. The note that KWG missed payment on was issued just eight months ago as part of an extension exercise. 

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“The first wave of restructurings, when the crisis first kicked off, was consisted mostly of amend-and-extend transactions that kicked the can down the road for only 12 to 24 months” and “did nothing to right-size balance sheets,” Brandon Gale, head of Asia restructuring at Houlihan Lokey, said at a media briefing last month. “So we believe that there’ll be another round of restructuring as these maturities come due in the next one to two years.”

KWG said on Sunday it has started working with advisers to explore a holistic solution for its offshore debt “to secure the sustainable operations of the Group for the benefit of all stakeholders.”

Its debt-repayment difficulties could be an indication of authorities prioritising construction projects being completed and creditors having to wait in line for repayment. “Under the requirement of local government policies, substantially most of the Group’s cash are under strict pre-sale cash escrow at designated bank accounts in order to ensure completion of the properties under development,” according to KWG’s filing. 

The builder last month disclosed it didn’t pay 212 million yuan of principal due on bank and other borrowings. That default triggered 31.2 billion yuan of debt becoming repayable on demand. KWG separately said in its annual report that the firm faces multiple uncertainties “which cast significant doubt on the Group’s ability to continue as a going concern.” BLOOMBERG