Indebted property giant Evergrande has brought in restructuring experts and warned it is under "tremendous pressure", as anxious investors and suppliers protested outside its offices this week.

The group has hired experts including Houlihan Lokey -- which advised on the restructuring of Lehman Brothers -- as it tries to avoid a collapse that could have major repercussions for the country's economy.

We take a look at what may be in store for the struggling conglomerate.

Bankruptcy

Evergrande denied rumours this week that it was battling bankruptcy but admitted it was "indeed facing unprecedented difficulties".

As a private company, Beijing might feel less compulsion to stop Evergrande hitting the buffers and could force it to file for bankruptcy if it is causing too much social unrest.

It is "quite possible" that the group will go bankrupt, said Chris Devonshire-Ellis, chairman at Dezan Shira & Associates, pointing out that Beijing let the Guangdong Investment Trust (GITIC) go bankrupt in 1999, leaving $4.4 billion in debts.

It comes as Beijing tries to boost "common prosperity" and tighten oversight of home-grown private giants.

However, most experts agree the state will not want to see Chinese homebuyers left out of pocket.

Larry Ong from SinoInsider said the "best-case scenario" is that authorities "find a way to keep Evergrande from declaring bankruptcy, give the company's creditors a glimmer of hope that they will walk away from the debacle with at least something, and avert the triggering of greater social unrest."

Debt restructuring

The group admitted Tuesday that asset sales -- including its New Energy vehicle group -- hadn't yet amounted to much, making a restructuring more likely.

But it would be an immense prospect and one of the biggest the country has ever seen.

"As Evergrande does face a large pipeline of loan interest repayments over the next twelve months, the process of renegotiating its debt obligations is expected to be complex," said Rajiv Biswas, APAC Chief Economist at IHS Markit.

Beijing has already been pressuring real estate groups to get rid of debt.

"On balance, I suspect the company will be restructured, with corporate investor parts of it allowed to go out of business and the parts with considerable private-public debt reorganized so the impact on Chinese family investments can be controlled and minimized," Devonshire-Ellis said.

"Beijing will want an orderly dismantling and redistribution of Evergrande's assets."

State bailout

Without government help, there are fears Evergrande will enter a downward spiral, particularly as the group warned property sales will drop this month due to waning confidence.

"Now there is a vicious circle: its negative news makes it impossible to sell its house and assets, which in turn leads to its lack of funds, and the lack of funds makes it impossible to solve the incoming problems," said Chinese property analyst Deng Haozhi.

He suggested there is a "high probability" of Evergrande being nationalised, saying that he understood local governments had already stepped in and taken over some real estate projects.

Bloomberg reported this week that regulators in the company's home province of Guangdong have dispatched a team of financial advisers to assess the company, at the request of Beijing.

A semi-bailout could also see the state take control of large parts of Evergrande, including the introduction of state-owned enterprise (SOE) investors, said Zhou Chuanyi of Lucror Analytic.

Ong warned that a bailout "will only signal to other debt-laden property companies and financial institutions that they can get away with the sort of practices that the government is trying to stamp out."

Legal claims

In August Evergrande warned of mounting legal challenges and the risks of defaults.

Two trust companies -- among Evergrande's largest non-bank creditors -- have already demanded immediate repayment on some loans, Bloomberg reported this month.

And in August an advertiser sued the company for unpaid dues, the first in a string of cases filed by nervous subcontractors.

Devonshire-Ellis said it was "inevitable lawsuits will swirl around with the strong potential of criminal charges also being levelled at some of the participants."

Increased supervision

Beijing had already started pressuring developers to offload debt and introduced the "three red lines" in a state crackdown last year to curb leverage in the property industry.

Biswas said China's regulators "are expected to play an important role in coordinating an orderly process for Evergrande's debt restructuring to avoid potential systemic risks to China's financial system."

"Companies like Evergrande will face more scrutiny at the executive level and I suspect Beijing will be more demanding of the type of executives that operate businesses valued beyond a certain figure," added Devonshire-Ellis.

bur-rox/reb

IHS Global Insight

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