China's Evergrande restructuring: What's the plan?

Debt-crippled Chinese property giant Evergrande looks headed for a huge restructuring after it defaulted on $1.2 billion in bond repayments and remains mired in further liabilities worth more than $300 billion.

What would a restructuring mean for creditors, homeowners and investors?

The government is keen to limit any contagion hitting the financial system, but is also deeply concerned about the impact on social stability if masses of angry investors take to the streets.

As such, homebuyers who have paid for residences that may or may not be delivered will likely be a top priority, followed by contractors working on the developer's projects, Capital Economics' chief Asia economist Mark Williams told AFP.

"Then we get down to the financial creditors and the banks, the bondholders," he said.

"That's where I think the fight will really take place... over whatever is left."

Foreign bondholders will likely be fairly low-priority, he said.

It appears not.

Also read: Chinese property giant Evergrande defaults for first time: Fitch

Concerned about moral hazard, and insisting that Evergrande's problems won't affect the financial system, regulators will be "happy to see the firm itself go under and investors take a haircut," said Louis Kuijs, head of Asia economics at Oxford Economics.

A state bailout would "run counter" to Beijing's efforts to deflate a worrying property bubble so as to reduce the economy's reliance on the real estate sector, added Larry Ong of SinoInsider.

Central bank governor Yi Gang said Thursday that Evergrande's failures to meet its debt obligations would be dealt with by the "market", a further clear sign that a bailout was not on the cards.

"Policymakers in Beijing will feel that... after all, the banks that have lent to Evergrande are state-owned banks, they can kind of work out their losses, they can cope with those," Williams said.

Based on past experiences, authorities may opt to allow Evergrande's main property business to continue running while non-core assets are sold, said Shujin Chen, an equity analyst at financial services firm Jefferies.

The proceeds could then be distributed among creditors according to legal priority, she added.

A creditor committee, where they vote on decisions, may also be formed.

Bondholders, however, might choose to take their cases to court.

Beijing could also get state-owned enterprises to buy Evergrande assets and entrust local governments to oversee restructuring work, Ong said.

One question mark is how to handle people who bought Evergrande wealth-management products that they now may not be able to redeem.

There could be unrest if Evergrande does not pay off those investors, Chen said.

"But it's also not reasonable to pay off this group first," Chen said. "This part is probably trickier."

Regulators face a delicate balancing act in allowing Evergrande to go under without generating too many waves.

Also read: What's next for Evergrande after missing coupon payments?

Kuijs said that to cushion the blow, the government might make it easier for developers to raise financing on capital markets, following earlier easing steps.

Officials could also adjust land policy, he said, and move to contain ripple effects in the financial system, "possibly ring-fencing banks particularly exposed to developers in trouble".

Ong said Beijing could also compel Evergrande and its billionaire founder Hui Ka Yan to sell assets to pay down debt.

China has in recent years completed restructurings via government takeovers of cash-strapped conglomerates including Anbang Group, Tomorrow Group and its related Baoshang Bank, as well as HNA Group.

In such cases, regulatory teams came in to take over and manage operations for between one and three years.

But Ong of SinoInsider said that model may not work given the scale and complexity of Evergrande's woes.

"There are no comparable precedents for what could happen to Evergrande," he said.

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