The default of Chinese housing developer Kaisa indicates the troubled company may soon be forced to enter bankruptcy proceedings – just as the industry is struggling to meet sales targets in an environment of oversupply and price correction.

At issue is whether Kaisa can meet the requirements of Sunac, which has proposed a conditional acquisition of Kaisa. There is increasing uncertainty whether the transaction will proceed.

“Sunac has indicated it’s not willing to wait indefinitely,” says Christopher Yip, director for corporate ratings at Standard & Poor’s. S&P downgraded Kaisa’s rating to D, indicating payment default, last month.

Coupon payments on Kaisa’s bonds due in 2017 and 2018 were to be made on March 18 and 19, respectively, and the 30-day grace period expired last weekend. The Shenzhen-based company said in a statement that it did not make scheduled interest payments of $16.1m on $250m in 2017 bonds and $35.5m on $800m of 2018 bonds.

“The company will continue its efforts to reach a consensual restructuring of its outstanding debts,” Kaisa said. The default makes Kaisa the first Chinese developer to default on its dollar bonds.

A restructuring of Kaisa’s debt is still the key prerequisite for Sunac to proceed with its transaction. The initial plan calls for a restructuring under which Kaisa’s coupon would be halved and interest payable in cash only after 2017.

A positive step towards resolving the debt restructuring negotiations came earlier in April when Shenzhen’s Urban Planning Land and Resources Commission partially lifted the sales blockage on Kaisa’s unsold units or investment projects in the city. But S&P doesn’t expect that to provide significant financial relief, because local Chinese courts have frozen some of the apartment units.

Kaisa’s travails have shone a harsh light on China’s property sector. Housing contributes an estimated 15% of the mainland’s GDP, and the crisis has prompted a re-rating of the risks in Chinese housing bonds.

The retrenchment has been swift and deep. Following record-high contracted housing sales in 2013, Chinese housing prices in 2014 declined in 68 out of 70 cities tracked by the National Statistics Bureau, NBS. Anticipating further price cuts, buyers have stuck to the sidelines, and many developers failed to meet their annual sales targets last year.

Tensions are rising. In mid-April, Kaisa reinstated its founding chairman – several months after having stepped down – and fired three staff members appointed from Sunac. The moves fueled speculation the takeover deal could collapse.

“The likelihood of Sunac completing its investment has somewhat diminished, if not disappeared,” said Singapore-based Lucror Analytics in a note that estimated the restructuring proposal valued the bonds at around 50 cents on the dollar. “We estimate that, absent the appearance of a white knight, USD bondholders could now be looking at a recovery of less than 10 cents in the dollar,” Lucror said.

While corporate defaults have been rare in China, Beijing is widely believed to be moving away from bailouts and toward allowing troubled companies to succumb to market forces.

That may be where the Kaisa situation is headed, says S&P. “Even if the restructuring is done, we expect it to be at a deep discount to the existing debt terms,” the agency says. “The restructuring would then be a distressed offer.”

S&P says its rating is not affected by another potential lifeline – the ¥1.377bn shareholder loan Kaisa obtained from a Sino Life subsidiary, Shenzhen Fund Resources Investment. “The loan reflects the second-largest shareholder’s willingness to retain Kaisa’s high-quality assets, in our view,” says a recent research note.

But the shareholder loan provides little relief to the liquidity crunch threatening Kaisa. “If the company’s cash flow continues to drain before its creditors accept a viable debt-restructuring plan,” says Yip, “Kaisa is likely to begin bankruptcy procedures.”