(Bloomberg) --
Zhenro Properties Group Ltd. defaulted for the first time after the debt-laden Chinese developer said it was unable to pay interest on two dollar bonds before a grace period ended Saturday.
The builder, which in February asked holders of about $1 billion of bonds set to mature this year for more time to repay, said in a Hong Kong stock exchange filing Sunday it didn't pay a combined $20.4 million of interest on two dollar bonds. That has resulted in events of default, according to the company.
Zhenro also said it might not be able to pay a combined $32.6 million of interest due on three other dollar bonds before grace periods end between April 10 and May 14. Failure to meet the obligations would also constitute events of default, the company said. However, the firm said it intends to pay the due interest on all five notes by May 31.
The missed payments are a reminder of the fragility of the Chinese property sector, which is grappling with a cash crunch and sales slump following a government crackdown on excessive leverage. Shares of Chinese developers fell on Monday morning, curtailing a three-week rally that was fueled by optimism policy makers may be preparing steps to support the industry.
Prices on Zhenro's dollar bonds plunged in February after it became one of China's property firms to flag distress amid the cash squeeze. Its 7.1% note due 2024 was indicated at about 13 cents on the dollar Monday, Bloomberg-compiled prices show.
Shares of Zhenro tumbled 10% as of 11:26 a.m. in Hong Kong. A Bloomberg Intelligence gauge of Chinese developer stocks dropped 3.8%, paring gains from a mid-March low to 40%.
Covid outbreaks in major Chinese cities risk prolonging the pain for developers, which have seen home sales drop since July. In its statement, Zhenro said some operations have been halted in recent weeks because of Covid-related lockdowns in Shanghai while sales and asset-disposal progress has been delayed.
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“This is definitely not helpful for the property sector as we just saw signs of a green-shoots recovery for March sales month-over-month,” said Andrew Chan, a Bloomberg Intelligence analyst. Other developers may also see a slowing of asset disposals, which would further hurt liquidity, he added.
See BI credit analysts' reaction to Zhenro's default event
Founded by businessman Ou Zongrong, Zhenro is among developers with origins in the province of Fujian whose fortunes have turned for the worse during China's crackdown on leverage.
Zhenro in January said it planned to redeem a perpetual bond and boasted that one of its units had secured a 9.14 billion yuan ($1.4 billion) credit line from state-owned Bank of China Ltd. The firm's short-dated bonds were trading near 80 cents on the dollar at the time.
The developer disclosed last month it received sufficient bondholder support for a proposed bond exchange and waiver of default claims as it worked to navigate the credit stress in China's property sector. Fitch Ratings downgraded Zhenro to restricted default following the swap.
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