Shares of Shimao Group and its services unit have been cut to underweight over “heightened concerns on liquidity,” by JP Morgan, citing concern property managers are being used as financial tools by developers such as by Shimao and Sunac China Holdings. That’s after a Shimao Group unit announced the sale of its property management assets to Shimao Services on Monday — a move JP Morgan said implied tight liquidity for Shimao and was a “corporate governance red flag.”

What’s the company?

Shimao Group Holdings is China’s 13th biggest developer by contracted sales and among the largest property debt issuers in China, with about $10.1 billion in outstanding local and offshore bonds. It develops residential, hotel, office and commercial properties, according to its website.

Its onshore unit, Shanghai Shimao Co, reported 99.2 billion yuan ($15.6 billion) in total liabilities as of the end of September, according to its financial results for the third quarter. Total assets reached 153.1 billion yuan.

The firm had passed all of the so-called three red lines — metrics introduced to curb borrowing among developers — according to Bloomberg-compiled data including first-half results. That would typically suggest a more robust financial position that may mean it has easier access to debt markets despite soaring borrowing costs.

What’s happening?

The company said it’s looking into market rumors, which it blamed for causing Monday’s selloff, according to an emailed statement.

Credit assessors have repeatedly slashed their views on Shimao, pushing the borrower into so-called fallen angel territory. Liquidity risk concerns have persisted, even after a recent share placement and the firm’s pledge of its Shanghai headquarters for financing.

Such worries have driven wild swings in the firm’s offshore bonds in recent months. Now its onshore notes continue to price in even greater risk: a local note sold by its onshore unit due 2022 is priced at about 42 yuan Tuesday, while an offshore bond also due in 2022 is at about 76 cents on the dollar.

Shimao’s billioniare founder Hui Wing-Mau’s personal fortune has tumbled by nearly half to $4.9 billion this year as shares in the firm plummeted 71%, as of Monday’s close.

Why does it matter?

The potential collapse of a higher-rated firm like Shimao, which as of Monday still held both investment and better speculative-grade ratings, would unravel the tentative recovery among Chinese dollar junk bonds.

The declines broke the buoyant mood that dominated trading last week, when Beijing’s shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years. Optimism over further easing steps had helped counter the long-anticipated defaults by Evergrande and Kaisa.

What do rating agencies say?

Shimao’s long-term rating was downgraded to BB+ from investment-grade with a negative outlook last month by S&P Global Ratings, which cited weaker-than-expected contracted sales. “This will hinder the company’s deleveraging prospects,” S&P said. “The margin for error is eroding given Shimao has a very tight headroom to begin with.”

The company already has a junk Ba1 long-term rating from Moody’s Investors Service. It still has an investment-grade rank of BBB- at Fitch Ratings.

What are traders watching for next?

The next test is whether the developer can honor upcoming debt obligations including trust payments. Shimao and its subsidiaries need to refinance or repay $2.5 billion in bond maturities through 2022. That includes a 30 million yuan repayment on a 4.5% local bond due Dec. 17 and a 2 billion yuan note due January, according to data compiled by Bloomberg.

The company did not immediately respond to a Bloomberg request for further comment.