(Bloomberg) -- The newfound stability in in Chinese dollar bonds will be tested this week as one of the market’s largest issuers announces whether creditors agreed to a debt swap designed to avert default.

Kaisa Group Holdings Ltd.’s offer to exchange its $400 million of dollar notes maturing Dec. 7 for new ones due 18 months later expires at 4 p.m. London time on Thursday. If the offer -- which requires a 95% approval rate -- fails to win support, the struggling firm has said it may not be able to repay bonds and could consider a debt restructuring. 

Kaisa is China’s third-largest borrower of dollar bonds among property firms, with some $11.6 billion outstanding. That represents more than 5% of developers’ debt in that currency. A default could spur contagion risk just as global investors return to offshore property bonds. Chinese developers need to repay some $2.1 billion in offshore bonds in December and $6.1 billion in January, according to data compiled by Bloomberg. 

An index of Chinese dollar junk bonds is little changed for November after prices plunged 18% over the previous two months. The rout began to reverse earlier this month as the government took steps to ease the cash crunch for higher-rated developers and companies scrambled to raise funds. There have been no defaults by real estate firms in November, after at least four in October.

“Risks of a debt restructuring for the most leveraged developers have not faded, but the worst may be over,” said Wei Liang Chang, a macro strategist at DBS Bank Ltd. “In the short-term, high-yield credit spreads are still likely to remain volatile.”

China’s much larger onshore credit market has remained much more resilient. Spreads on China’s riskier AA rated bonds tightened to an average 131 basis points so far this month, compared to 142 basis points over October. State-owned developers have rushed to sell yuan bonds amid media reports authorities are loosening curbs for the industry to sell domestic notes. 

Sentiment toward China’s credit market turned more upbeat in recent weeks as money managers including T. Rowe Price Group and Allianz Global Investors took advantage of the recent turmoil to add higher-rated developer bonds. Speculation the economic slowdown will prompt policy makers to scale back property tightening measures added to the buoyant mood.

Yet borrowing costs remain exorbitant for stressed developers to tap the offshore market, with the yield on Chinese junk dollar bonds hovering around 20%. Instead firms have looked for alternative routes -- typically fire sales of assets, share placements and founders using their own funds. 

China Evergrande Group agreed to sell its remaining stake in internet business HengTen Networks Group Ltd. at a loss of HK$8.5 billion ($1.1 billion). Chairman Hui Ka Yan raised about $344 million selling shares in the company last week. 

Kaisa is selling a Hong Kong property project for around HK$500 million ($64.1 million), less than the company paid for it last year, Bloomberg reported. Separately, the firm is planning to put 18 projects in Shenzhen up for sale with a total value of $12.8 billion

 

Offering to extend bonds is another way to avoid default. A unit of Yango Group Co. received creditor approval this month to exchange three of its dollar bonds with a total outstanding value of $747 million.

Kaisa’s exchange offer has limited incentives for bondholders, according to HSBC Holdings Plc. Even if if successful, the plan is “at best kicking the can down the road,” HSBC credit analysts including Reks Ng wrote in a report last week.

A Kaisa default is “inevitable” in the next six months, S&P Global Ratings said this month, before downgrading the firm deeper into junk and withdrawing its rating. Many of the company’s bonds are trading at around 35 cents on the dollar, or less. Kaisa previously defaulted on bonds in 2015, and then restructured its borrowings.

 

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