(Bloomberg) -- A Chinese program providing state guarantees to developer bonds will be put to the test this week, when payments come due from one of the most indebted builders.

The sum owed by Country Garden Holdings Co. is relatively small — 65.95 million yuan ($9.1 million) for two interest payments. Both notes are guaranteed by China Bond Insurance Co., a state-owned credit-support provider at the heart of a program introduced by authorities in August 2022 to help private developers avoid liquidity crunches.

None of the builders that have used the program have missed payments on the guaranteed securities. Yet while Country Garden itself recently dodged its first local default on yuan bonds, strains have mounted after it missed payments on dollar notes last year. The builder is fighting a liquidation petition filed by a creditor in a Hong Kong court, and the first hearing is scheduled for May 17. 

“It is unclear whether Country Garden has the cash and willingness to pay the coupon given the sharp and continued contraction of its contracted sales,” said Zerlina Zeng, senior credit analyst at Creditsights Inc. “However, we expect China Bond to step in if Country Garden misses the payment as failing to do would shake market confidence towards the bond guarantee program.”

So far at least 33 bonds have been issued by private developers via the program, with 33.7 billion yuan raised in total, according to Bloomberg-compiled data. Because payments on most of these bonds won’t be due until 2025 or 2026, the program hasn’t faced a real test so far.

Country Garden’s sheer size — with more than 3,000 housing projects in mainly smaller cities, according to its 2023 interim report — underscores its importance to the broader economy and the stakes for government if the guarantee program has to be tapped. 

Aside from Country Garden, private developers that have issued bonds via the program include defaulted builder CIFI Holdings Group Co., as well as Longfor Group Holdings Ltd. and Seazen Group Ltd., among others. 

The program is aimed at shoring up a sector that is still deeply mired in debt. During the boom years, many home buyers paid developers in advance for unfinished apartments. Now Chinese private developers face a 4 trillion yuan funding gap to complete pre-sold homes, according to a research report by Goldman Sachs Group Inc.

Once China’s largest developer by sales, Country Garden has been hit hard by the property crisis and now is saddled with 1.36 trillion yuan of total liabilities, according to its unaudited 2023 interim results.

The Foshan-based company reported contracted sales for April of 3.9 billion yuan, compared with 22.7 billion yuan in the same period last year. 

(Adds liquidation hearing)

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