Less than two years after China Evergrande Group’s default sent shockwaves around the world, an even larger Chinese developer is on the brink.

Country Garden Holdings Co.’s bonds and shares have plunged this week after bondholders failed to receive coupon payments of two dollar notes by an initial deadline, raising concern it will be the next giant to default.

Late on Thursday, the company revealed the depth of its funding challenges by saying it expects to post a net loss of 45 billion yuan to 55 billion yuan ($7.6 billion) for the first half of 2023. That compares with earnings of 1.91 billion yuan a year earlier. On Friday, local media Yicai reported Country Garden is preparing for restructuring and has hired a financial adviser, citing unidentified people.

Country Garden’s financial struggles are confirming investors’ worst fears about the nation’s vast property market, which has resumed a downturn after a brief first-quarter rebound. Home sales tumbled the most in a year in July, making it harder for real estate firms to get cash needed to alleviate the credit crisis. Failure by Country Garden to pay its debts would pummel fragile investor sentiment just as Beijing seeks to revive the troubled property market.

“Country Garden may have willingness to pay its debts, but it is too cash-strapped,” said Monica Hsiao, founder and chief investment officer of Triada Capital. “Short of a positive policy surprise, restructuring is likely only a matter of time.”

Investors are pricing in a worst-case scenario. A Country Garden dollar bond due January has fallen 14.7 cents to 8.7 cents this week, according to data compiled by Bloomberg. In December, it was trading at 75 cents. The firm’s debt was downgraded three notches Thursday by Moody’s Investors Service to Caa1 from B1.

The company’s shares fell as much as 14% Friday to HK$0.89, on course to close below HK$1 for the first time ever. It has tumbled 65% this year, the worst performer on Hong Kong’s Hang Seng Index. The firm didn’t respond to requests for comment by Bloomberg.

Headquartered in the southern city of Foshan in Guangdong province, Country Garden was China’s largest developer by contracted sales from 2017 — when it took the top spot from Evergrande — through 2022. The company dropped to sixth place this year as its sales slumped. The firm focused on building housing developments in lower-tier cities, which have been harder hit by the slowdown than first-tier cities such as Beijing and Shanghai.

“Due to the recent deterioration of sales and refinancing environment, the available funds in the book of the company have been continuously reduced, resulting in a phased liquidity pressure,” Country Garden said in Thursday’s statement.

Total Liabilities

Country Garden has the largest pool of outstanding dollar bonds among China’s biggest property firms, excluding defaulters, with some $9.9 billion outstanding, Bloomberg-compiled data show. Its total liabilities amounted to 1.4 trillion yuan at the end of last year. The company will join a slew of defaulters such as Evergrande if it doesn’t make its missed payments within a 30-day grace period.

“Any default would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects,” Bloomberg Intelligence analyst Kristy Hung wrote in a report Wednesday. “Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

Read more: Country Garden Is in Danger of a Default Rivaling Evergrande

The prolonged slump in China’s property sector has brought previously sound companies to their knees, with firms such as Central China Real Estate Ltd., a state-backed developer, repeatedly using grace periods to buy time before stopping payments. In July, creditors of a unit of Dalian Wanda Group Co. and state-backed Sino-Ocean Group Holding Ltd. received coupons at the last minute.

Growing concern over Country Garden has weighed on the broader junk dollar bond market. Average prices of the nation’s high-yield US currency notes fell to 66.5 cents on Thursday, the lowest since early December, according to a Bloomberg index.

Revive Demand

Regulators across China’s government have been seeking to revive demand in the property industry, which makes up about a fifth of China’s gross domestic product. The sector is caught in a vicious cycle where failing developers put homebuyers off purchases, which then crimps cash flow of companies.

Last week, the central bank vowed to increase funding support for the private sector. That came after the Communist Party’s Politburo — its top decision-making body — in July signaled a shift toward looser policies for the property market.

“Collapse of another major private developer wouldn’t help with restoring confidence among prospective homebuyers,” JPMorgan Chase & Co. analyst Frank Pan wrote in a report dated Wednesday. “This could cast more doubts on effectiveness of policy tools to stabilize the housing market. Ultimately, the weaker SOE-backed developers that so far have retained access to unsecured funding onshore could face drags due to the negative backdrop.”

China’s securities watchdog plans to hold a meeting on the real estate market on Friday, underscoring growing urgency among regulators to deal with a worsening housing crisis. The China Securities Regulatory Commission will convene with some property developers and financial institutions virtually, people familiar with the matter said. Country Garden was not among those invited, one of the people said.

Country Garden is chaired by billionaire Yang Huiyan, whose fortune has shrunk by almost $29 billion since its peak in June 2021, leaving her with a net worth of $5.3 billion, according to the Bloomberg Billionaires Index.

Read more: Country Garden Chair Loses More Wealth Than Any Billionaire

In a move that spooked the market, Yang last month transferred a substantial part of her personal stake in Country Garden Services Holdings Co., which she also chairs, to a charity foundation controlled by her sister. UBS Group AG analysts said the timing was “unusual.” Days later, the property manager brought forward the payment date of its 2022 dividends and special dividends.

Yang has given “strong support” to Country Garden since its listing, the firm said in the Hong Kong exchange filing Thursday night. Together with family members this totals about HK$38.6 billion ($4.9 billion) in loans, increases in shareholding, bond purchases and scrip dividends, it said, without specifying how much of the support came recently.

Read more: Country Garden Billionaire Bags Big Payouts as Default Looms

Yang’s father Yeung Kwok Keung co-founded Country Garden in 1992 in the southern Chinese city of Foshan, and transferred a controlling stake to her in 2005 after she joined the company as his personal assistant to learn the ropes and eventually succeed him.

The developer grew rapidly over several decades as the nation’s housing market boomed, making a name for itself in the Guangdong province bordering Hong Kong with the slogan to “get yourself a five-star home.”

--With assistance from Venus Feng, Alice Huang, Shuiyu Jing and John Cheng.