The crisis at Evergrande, the world's most indebted property company, reached a milestone last month when it officially defaulted on offshore bonds. But the rest of the saga could take years to unfold.
The builder, a symbol of China's heavily leveraged property sector, shook world markets when it started missing offshore bond payments in September.
It took three months for Evergrande, weighed down by construction delays, litigation and its vast liabilities of more than US$300 billion ($443.1b), to formally default, by which time liquidity troubles had engulfed the sector.
The company launched a risk committee, with the majority of seats held by representatives of state-owned companies in the southern province of Guangdong, where it is based. Meanwhile, there are signs Evergrande's billionaire chair Hui Ka Yan has come under pressure to draw on his own resources to support the company.
While last month brought some clarity over Evergrande's default status, the developer's fate and that of many of its peers remains uncertain. Here is what we know about the anticipated restructuring process:
Beijing is prioritising the domestic homeowner
Beijing's priority is to ensure that apartments are delivered to customers, many of whom paid for properties prior to their completion.
The government and Evergrande have been working to resume activity at construction sites which could generate cash flows to service the company's debts.
In late December, Evergrande said in a social media post that work at 92 per cent of its projects, which number in the hundreds across China, had resumed. But separate data showed its housing sales had slumped 99 per cent year on year in the same month.
Even before its default in December, there were signs that the government, especially regional authorities, were pushing for work to continue on projects. Those local government bodies could come under financial pressure themselves if projects prove unprofitable.
"We felt strongly that the government was going to play a role and that it would probably provide capital to protect the consumer to finish projects for people's primary residences," said one former investor who has sold their position.
"Then they would turn to local [contractors] and local banks and then eventually they would get to offshore bonds." The investor estimated the process could take five years.
Offshore investors are in the dark
For international investors in Evergrande, which have included asset managers such as BlackRock and distressed debt buyers in the US, the orchestrated, slow-burn collapse could mean it is a long time before any clarity emerges on their positions.
Offshore investors, who are the main link between international financial markets and China's real estate troubles, have found themselves largely in the dark since the missed payments began.
Evergrande has borrowed about US$19b internationally, which is more than any other developer but still a fraction of its total liabilities.
"It feels like a slow-motion car crash that, because it's so high profile for the government, may never actually fully crash," said one investor who has been following the situation closely. "The ongoing issue with this entity is the black-box nature of it."
In October, law firm Kirkland & Ellis and investment bank Moelis & Company, which are advising a group of international bondholders, complained of little meaningful engagement from the company.
"Onshore and offshore are really two different animals — we're trying to focus on having a clear picture on all of the offshore liabilities," said another person with knowledge of the Evergrande saga.
The government "are the ones who can make a call to a bank and say extend that loan, they are the ones who can make a call . . . to the contractors, suppliers".
"This is a huge complicated machine that came to a brutal halt over late summer and September," the investor added. "Potentially, there is value left."
Evergrande is delaying repayments
The developer has provided little concrete information about the restructuring in its official statements. This month, it held a call with investors in its renminbi-denominated bonds in a successful attempt to postpone repayments by six months, echoing a series of delays in offshore payments over recent months.
Its attempts to raise cash through asset sales, which it had been pursuing long before the liquidity crisis burst into the open last year, have also been delayed.
One Shanghai-based person familiar with the process noted that the risk management group set up last month still needed to work out the size of Evergrande's off-balance sheet assets and liabilities.
The person said the developer was unlikely to be allowed by Beijing to make big asset sales until authorities had a clear view of its true financial situation.
Beijing has a history of stagecrafting corporate collapses
While the prospect of a drawn-out and closeted resolution contrasts with messy bankruptcies playing out in the media in the US and Europe, the Evergrande saga resembles other examples in China's corporate history.
HNA Group, the acquisitive conglomerate that hoovered up a range of overseas assets including a large stake in Deutsche Bank, faced debt issues years before it was finally declared bankrupt last year.
By then, the shockwaves from its collapse had been dulled by widespread interventions behind the scenes that culminated in a deal to revamp more than 300 group companies into four new entities.
But no corporate failure has been as closely watched as Evergrande's, which along with its developer peers has played an outsized role in building China's cities and driving its economic growth. Its struggles pose difficult longer-term questions for the country's growth model.
"It's not clear that there is a holistic centralised legal framework for what's happening in Evergrande, it's all ad hoc fiat," said an industry veteran.
The impact of Evergrande's crisis isn't going away
The crisis has triggered a sector-wide cash crunch that has threatened the Chinese economy and raised questions about President Xi Jinping's push to constrain the highly leveraged property sector.
In international markets, effective yields on Chinese high-yield bonds are about 24 per cent, according to an ICE index. That number is below decade highs of almost 30 per cent in November but remains at a level indicating severe distress, with turbulence at Evergrande playing a central role in driving the original market sell-off.
Onshore, developers have also faced issues with renewing financing, especially for wealth management products, which in September led to protests outside Evergrande's headquarters in Shenzhen.
Struggling to refinance, a number of developers including Kaisa Group, Fantasia Holdings and Modern Land China have defaulted, and property activity and sales have slowed sharply. Last week Guangzhou R&F, another developer, was placed in restrictive default by Fitch after extending maturities on its debts.
Defaults are expected to continue this year. Goldman Sachs in January forecast that 19 per cent of high-yield property debt would default, after defaults of 28 per cent last year, warning that "stresses are picking up".
Written by: Thomas Hale, Joe Rennison and Sun Yu
© Financial Times