By Xie Yu and Carolina Mandl

HONG KONG/NEW YORK Some holders of Country Garden offshore bonds are in talks with law firm Ashurst to form a group to consider options if the Chinese property developer fails to meet debt repayment obligations, two sources familiar with the matter said.

Hedge funds specialising in distressed bond investments and restructuring have been involved in the discussions with the London-headquartered law firm, said the sources, who declined to be named as they were not authorised to speak to the media.

Ashurst did not respond to a Reuters request for comment. Country Garden, the country's largest private-sector property developer, declined to comment.

Although it is one of the few leading private developers in China that has not defaulted on offshore debt obligations, Country Garden last week narrowly dodged default with a last-minute $22.5 million coupon payment.

Country Garden, which has seen sales plunge, last month warned of default risks if its financial performance continues to deteriorate.

It has 108.7 billion yuan ($14.9 billion) of debt due within 12 months but only cash of 101.1 billion yuan as of end-June.

This month, at least five coupon payments are due, including two relatively sizable dollar bond coupons worth $15 million due on Sept. 17, and $40 million on Sept. 27, each with a 30-day grace period.

China's property sector, which accounts for roughly a quarter of the country's economy, has been in crisis since 2021 after the government sought to clamp down on ballooning debt and it has yet to experience a revival in sales.

Many creditors believe Country Garden will have to undergo a debt revamp if it doesn't get liquidity support soon.

Some offshore creditors are also talking with New York-based law firm Kobre & Kim LLP and are looking at forming a group if the company seeks to restructure its debt.

One of the sources familiar with the talks with Ashurst said some bondholders have formed informal groups to discuss potential options. Some offshore Chinese funds and wealthy individuals who hold Country Garden bonds are also involved in the talks with Ashurst, said the other source.

Some of the Country Garden bondholders are also discussing how the developer's offshore assets can be leveraged if there is a default, said the two sources.

(Reporting by Xie Yu in Hong Kong and Carolina Mandl in New York; Editing by Sumeet Chatterjee and Edwina Gibbs)