HONG KONG • Chaotic scenes erupted yesterday at the headquarters of cash-strapped developer China Evergrande Group, as about 100 disgruntled investors crowded its lobby to demand repayment of loans and financial products.
Around midday, more than 60 uniformed security personnel formed a wall in front of the main entrances to the glistening tower in the southern Chinese boom town of Shenzhen, where protesters shouted at company representatives and attempted unsuccessfully to push through the security line blocking access to lifts.
The protest comes amid worries that China's most indebted developer, with liabilities of 1.97 trillion yuan (S$410 billion), will be unable to repay investors and its debt woes could pose systemic risks to the country's financial system.
Evergrande may undergo one of China's biggest-ever debt restructurings. Debt delinquencies at developers the size of Evergrande are so rare in China that investors, analysts and regulators have only a few case studies to go on.
Any disorderly failure by the firm may pose a threat to the financial system. The lack of clear precedents also means the Chinese authorities have yet to test mechanisms in solving a debt problem quite like Evergrande.
Meanwhile, 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 source familiar with the matter said last week.
Below are three potential scenarios.
1 BASE CASE
Evergrande restructures its debt and bond holders recover a portion of their funds. This would be an "orderly wind-down", said Ms Omotunde Lawal, head of Barings' emerging-market corporate debt group.
There may be some contagion across China's property issuers at first, according to Nomura International Hong Kong credit analyst Iris Chen, though sentiment would improve as a key overhang would be removed.
She expects only a 5 per cent recovery rate for investors in Evergrande unit Scenery Journey.
It is essential that normal operations continue after any potential default of a Chinese developer, wrote Morgan Stanley analysts led by Mr Kelvin Pang on Aug 18.
The government would likely be involved in a restructuring process, CreditSights Singapore senior research analyst Luther Chai said in e-mailed comments, though Beijing is unlikely to prevent a default or be seen as a creditor of last resort.
The Communist Party of China's involvement would come later, allowing it to address moral hazard in the credit market while ensuring that any potential social, financial or economic fallout is limited.
2 BLUE SKY
A complete or partial takeover by a state-owned enterprise is another possibility, although Ms Chen assigns a low probability to this scenario.
She said Evergrande could also sell its listed assets at better prices if market conditions improve, and she predicts this would give bond holders a recovery rate of 30 per cent or more.
Evergrande could buy some time to improve its liquidity over the next year, according to Mr Chai at CreditSights.
In this scenario, Evergrande would repay some of its nearest-term dollar bonds upon maturity. The developer has two sizeable dollar bonds due over the next 12 months, or a combined US$3.5 billion to pay.
Liquidation is a scenario in which bond holders may get close to nothing. This is unlikely, however, said Mr Chai, because it would "wreak havoc across China's property and banking sectors, and related companies such as Evergrande's suppliers".
Morgan Stanley analysts have said that "all parties are incentivised to avoid a liquidation scenario" in the restructuring of any Chinese property developer.
Another negative scenario would involve Evergrande bringing some of its off-balance sheet debt back into the books, according to Ms Chen.
These assets could have priority over the dollar bonds in a recovery and if the off-balance sheet debt is higher than expected, bond holders could get less than 15 per cent of their money back.