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Fitch Places Wanda's 'BBB' Ratings on Watch Negative
October 6, 2017 / 9:07 AM / 2 months ago

Fitch Places Wanda's 'BBB' Ratings on Watch Negative

(The following statement was released by the rating agency) HONG KONG, October 06 (Fitch) Fitch Ratings has placed Dalian Wanda Commercial Property Co. Ltd.'s (Wanda) 'BBB' Long-Term Foreign-Currency Issuer Default Rating (IDR), its senior unsecured rating and the rating of its outstanding US dollar senior notes on Rating Watch Negative (RWN). A full list of rating actions is at the end of this commentary. The RWN is due to the lack of clarity surrounding Wanda's offshore liquidity. The early termination provisions in some of Wanda's offshore loans were triggered by the downgrade of Wanda's ratings by agencies other than Fitch, which affect offshore syndicated loans totalling around USD1.7 billion, according to management's estimation. We believe Wanda has the option to negotiate with its lenders. Wanda has some offshore cash reserves, but they may not be sufficient to address the USD1.7 billion early repayment. The company had sizeable onshore cash of CNY137 billion (around USD20 billion) at end-1H17, but offshore remittance requires the State Administration of Foreign Exchange's (SAFE) approval. The USD1.7 billion syndicated loans are small relative to the company's total debt of around USD33 billion. However, Wanda's liquidity position could face substantial pressure if it fails to pay its offshore creditors that are demanding early repayment. This will likely trigger the cross-default clauses of USD1.2 billion in senior notes, potentially adding to repayment pressures. It is possible there are similar clauses in Wanda's other loans. Wanda's onshore local currency notes also have various creditor protection measures that could be triggered by non-payment events. Wanda is working to resolve its offshore liquidity needs but limited progress had been made given the week-long public holiday in China through 6 October 2017. Fitch expects to receive more information and clarity on the full extent of the company's offshore liquidity needs, and its options and plans to address the situation in the coming week. The Rating Watch will be resolved based on the company's ability to address its liquidity needs. Wanda's credit profile is supported by the ongoing execution of its asset-light strategy that will lead to a material debt reduction, and by its strong business profile as China's largest shopping-mall operator and its recurring rental income that is the second-largest globally. These factors continue to support its 'BBB' IDR. However, the failure to avert a significant liquidity crunch, for example, due to the triggering of cross-default clauses and the resultant acceleration of a significant share of the company's debt, will lead to a multiple-notch downgrade of Wanda's ratings. KEY RATING DRIVERS Negotiation with Lenders Critical: Fitch believes Wanda's most likely resolution option is holding talks with its lenders as maintaining its long-term business relationships with the banks will keep the company's offshore funding options open. Wanda is also an important client of onshore banks due to the business opportunities it brings as its operation is highly cash generative and its assets span a large part of the country with especially strong influence in the lower-tier cities. Heightened Offshore Liquidity Needs: Wanda has said the company is taking steps to resolve its urgent liquidity needs. However, detailed information remains unavailable due to the week-long public holiday in China. The company can only begin negotiations with its lenders or apply to SAFE after the holiday and we believe any preliminary results will likely take at least one to two weeks. Wanda does have some offshore liquidity although it is unclear if this amount is sufficient to meet its immediate repayment needs. Cross-Default Complications: Wanda's failure to resolve its immediate offshore liquidity needs may lead to further liquidity calls that will put pressure on its position. Wanda's USD1.2 billion in offshore bonds contain cross-default clauses that will likely be triggered if it fails to pay any amount required, or if debts "become due and payable prior to its stated maturity by reason of any actual default, event of default or the like". Fitch does not discount the possibility of such clauses being included in its other borrowings. For Wanda's onshore medium-term notes, there are investor protection clauses that will likely be triggered if there is a failure to pay, requiring Wanda to conduct noteholder meetings to address its obligations to them. It is therefore imperative that Wanda fully addresses its obligations promptly to repay the portion of its offshore syndicated loan that has become due. Multiple-Notch Downgrade Risk: Negative rating actions may be taken if the cross-default clauses of Wanda's debts are triggered. This is despite Wanda having a large cash position of CNY137 billion at end-1H17, which is expected to increase to over CNY170 billion, assuming its asset disposal plans announced in July are completed. Wanda had total bank and other loans at end-1H17 of CNY160 billion that we estimate will drop to CNY130 billion after the asset sale. Bank and other loans, which are mostly secured borrowings, still comprise over 60% of its total borrowings post asset disposal and therefore maintaining access to these funding sources remains critical to supporting its ratings at their current level. Strong Investment Property Portfolio: Wanda is China's largest shopping-mall operator by the number of properties it owns and its recurring income scale. Wanda has 211 Wanda Plazas in operation, with another 13 million sq m under construction that will add close to 100 Wanda Plazas. Compared with global peers, Wanda's 2016 rental EBITDA of CNY12.2 billion (USD1.8 billion) ranks it second, behind only Simon Property Group, Inc. (A/Stable), and is higher than the USD1.6 billion EBITDA of Unibail-Rodamco SE (A/Stable) and Swire Properties Limited's (A/Stable) USD1.2 billion. DERIVATION SUMMARY Wanda's investment property scale is comparable to major global investment properties companies like Simon Property, Unibail and Swire Properties (A/Stable). Wanda operates in the less mature Chinese market with shorter-dated lease terms compared to the stable and mature markets in the US, Europe, and Hong Kong, respectively, for the three peers. Wanda's investment property portfolio of 211 retails malls is more comparable with Simon Property that also has more than 200 retail outlets. Wanda's retail malls, however, lack the strong rental rates and capital values enjoyed by Unibail's retail malls and are also not as diversified as Swire Properties'. Wanda bears a higher borrowing cost than these peers and needs to maintain high liquidity, which adds to its funding costs. Wanda's credit metrics are weaker than all three as its recurring EBITDA/gross interest of less than 2.0x is lower than its peers' average of more than 5.5x. Its net debt/recurring EBITDA is weaker than Simon Property's and Swire Properties', but stronger than Unibail's. Wanda's multiple-notch rating difference with these peers reflects its slightly weaker business and financial profile, in addition to the rating constraint that its parent, Dalian Wanda Group Co., Limited, exerts on its ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Asset sales to Sunac China Holdings Limited (BB-/RWN) and Guangzhou R&F Properties Co. Ltd. (BB/RWN) completed in 2017 - 6% positive rental reversion each year - Balance of Wanda Plaza development land bank to be sold by 2020 - Trade payable to decline 55% by 2019 - Dividend paid to average CNY5 billion per annum over next five years RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action, Potentially a Multiple-Notch Downgrade -Wanda fails to pay any of its offshore loans that are due; -Wanda is unlikely to meet its immediate offshore liquidity needs in a timely manner; -Wanda fails to provide a comprehensive plan in addressing its offshore liquidity needs before 20 October 2017. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Watch resolved with ratings affirmed and Negative Outlook - Wanda having resolved its immediate offshore liquidity needs that will show that its offshore funding access remains intact. LIQUIDITY Liquidity Risk May Rise: Wanda's large liquidity position of over CNY170 billion may still be insufficient if its total debt of more than CNY216 billion becomes due because of cross-defaults leading to acceleration of all of its debt. Wanda had around CNY137 billion in available cash at end-1H17, while its short-term debt was under CNY30 billion. Wanda will receive net cash of over CNY33 billion if it follows through with its asset disposal plan announced in July. This will give Wanda sufficient liquidity to cover all of its bank loans, leaving sufficient cash for its capex. Barring a debt acceleration scenario, Wanda's onshore liquidity remains adequate for the next 18 months. FULL LIST OF RATING ACTIONS Dalian Wanda Commercial Property Co. Ltd. -- Long-Term Foreign-Currency IDR of 'BBB' placed on RWN; -- Senior unsecured rating of 'BBB' placed on RWN Wanda Properties International Co. Limited -- USD600mln 7.25% notes due 29 Jan 2024 rated 'BBB' placed on RWN Wanda Properties Overseas Limited -- USD600mln 4.875% notes due 21 Nov 2018 rated 'BBB' placed on RWN Contact: Primary Analyst Su Aik Lim Senior Director +852 2263 9914 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Vicki Shen Director +852 2263 9918 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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