Battle between China developer Kaisa Group and creditors just beginning

A brewing battle between embattled Kaisa Group and its offshore creditors is just getting started after the troubled Shenzhen developer announced a sweeping restructuring plan for billions of dollars in borrowings, highlighting the skimpy level of protection for overseas investors in mainland China.

"I don't think it'll be open and shut. My guess is there will be at least one or two more rounds before they get a settlement," Graham Lim, a partner at international law firm Jones Day, told the South China Morning Post.

Kaisa is asking offshore creditors to swallow up to a 66 per cent cut in coupon rates, add five years to bond repayment terms, and accept new debt if it could not meet coupon payments - or face the firm's liquidation that may see them get back only 2.4 percent of their money. "There is little protection or recourse for offshore creditors to Chinese onshore entities," said Michel Lowy, the CEO of SC Lowy, an investment bank that sells high-yield credits to institutional investors. "The main leverage in any discussion is the mutual negative consequences for controlling shareholders and creditors alike of a liquidation outcome."

If the restructuring fails, a proposed acquisition by Sunac China may fall through and Kaisa's cash flow and viability will come under further strain.

Even if talks are successful, it will still constitute a default as far as Moody's is concerned. The global ratings agency added in a note Monday that Kaisa "announced material deterioration in its financial profile and the proposed offshore debt restructuring highlight its elevated liquidity risk, but will have no immediate impact on its Ca corporate family and senior unsecured debt ratings."

International law firm Kirkland & Ellis is grouping offshore bondholders to increase their bargaining power, but Kirkland associate June Yuan declined to comment further, citing the sensitivity of the issue.