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BEIJING: China Evergrande Group may undergo one of the country’s biggest-ever debt restructurings, if the developer’s distressed-level bond prices are any indication.

It’s “almost unavoidable,” said Nomura International Hong Kong Ltd credit analyst Iris Chen. Her base case is a government-supervised deal that ensures Evergrande delivers homes and pays suppliers, where dollar debt investors would get 25% of their money back.

Luther Chai, a senior research analyst at CreditSights Singapore LLC, also says Evergrande will default and enter restructuring. That risk is being priced in, with many of Evergrande’s dollar bonds trading near 30 US cents (RM1.24).

Debt delinquencies at developers the size of Evergrande are so rare in China that investors, analysts and regulators would only have a few case studies to go on. Kaisa Group Holdings Ltd in 2015 became the first Chinese builder to default on dollar bonds. The restructuring of another, China Fortune Land Development Co, is currently under negotiation.

Any disorderly failure by the firm may pose a threat to the financial system. The lack of clear precedents also means Chinese authorities have yet to test mechanisms in solving a debt problem quite like Evergrande, which has more than US$300bil (RM1.24 trillion) in liabilities.

Evergrande didn’t immediately respond to a request for comment on its financial health.

Regulators in Beijing have signed off on an Evergrande proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve, a person familiar with the matter said last week.

Below are three potential scenarios.

>Base caseEvergrande restructures its debt and bondholders recover a portion of their funds. This would be an “orderly wind down,” says Omotunde Lawal, head of Barings LLC’s emerging-market corporate debt group.

There may be some contagion across China’s property issuers at first, according to Nomura’s Chen, though sentiment would improve as a key overhang would be removed. She expects only a 5% recovery rate for investors in Evergrande unit Scenery Journey Ltd.

It’s essential that normal operations continue after any potential default of a Chinese developer, wrote Morgan Stanley analysts led by Kelvin Pang in an Aug 18 note.

In other words, construction projects would be completed and homes would be delivered. And because dollar debt funding is “crucial” for developers, a defaulted property developer may not necessarily favour onshore creditors over those offshore, according to Morgan Stanley.

The government would likely be involved in a restructuring process, CreditSights’s Chai said in emailed comments, though Beijing is unlikely to prevent a default or be seen as a creditor of last resort.

> Blue skyA complete or partial takeover by a state-owned enterprise is another possibility, though Nomura’s Chen assigns a low probability to this scenario. Evergrande could also sell its listed assets at better prices if market conditions improve, says Chen, which she predicts would give bondholders a recovery rate of 30% or more.

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