“Defaulting is not the end of the world,” Thompson said. “The problem with some of these companies is, in order to avoid a default, they borrow a lot of money and incur a lot of costs without delivering a sustainable solution.”

Country Garden is out, Sinopharm in, as Hang Seng Index rebalances

As it continues to stave off a default, Country Garden has proposed a debt-extension plan for one of its onshore bonds totalling 3.9 billion yuan (US$533.6 million) due on September 2, and is looking to reach an agreement with its creditors, according to Chinese media outlets Jiemian and the Paper. As part of the plan, it will pay back each creditor 100,000 yuan first and then repay the remaining amount in seven instalments over three years.

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An official announcement about the details and progress on the proposal are expected soon, according to people familiar with the matter.

Some of Country Garden’s bondholders are demanding full repayment of the bond due early next month. The bondholders, who collectively hold 10.5 per cent of the 5.65 per cent note, made the request in a proposal outlined in a Country Garden filing to the Shanghai Stock Exchange’s private disclosure platform. The filing, dated August 18, did not reveal other details of the bondholders.

Country Garden plans to convene a bondholder meeting to vote on its own extension plan and the separate full repayment request between August 23 and August 25, according to the filing.

The developer and its subsidiaries face more than US$2.5 billion in coupon payments and maturities of onshore and offshore debt before the end of this year, according to JPMorgan.

“The general rule is if you cannot pay everyone when due, you stop paying all creditors and restructure your debt in order to treat all creditors fairly,” said A&M’s Thompson. “You will still have cash and the business stays valuable, because you can still run your business and you can stabilise the business to ensure you can keep good workers, and even pay them more money.”

Country Garden warns of large first-half loss amid real estate sector pressures

Without additional credit support from Chinese regulators and sizeable financial institutions, the company will continue to see an elevated risk of defaulting on its overseas debt, Morningstar analysts said. Some measures that Country Garden could employ to stay alive include asset disposals, debt maturity extension and exchange offers, share placements and shareholder injections, they said.

“However, we think this is easier said than done: asset disposals and debt-exchange offers might buy the developer some time but do not completely absolve it of its debt woes,” they said, adding that the effectiveness of such measures is also questionable, given that other developers have also employed such measures in the past but still defaulted subsequently.

If Country Garden does fail to repay its debt on time, a possible impact is that it might be followed by other developers, said John Lam, managing director, head of China and Hong Kong property research, at UBS.

China’s top developer expects first half loss, seeks government support

“More developers, especially those who are privately owned enterprises, will probably tend to … consider debt extensions or restructuring [rather than paying off their debt in time],” Lam said. “In the current environment, the costs will be large if they do not [consider debt extensions or restructuring], because the contracted sales might not necessarily go up even if you try to avoid a default.”

Companies should try to keep onshore debt current if they can, “because onshore restructuring processes are harder to get done than offshore ones”, said A&M’s Thompson.

Additional reporting by Bloomberg