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Fitch Affirms Wanda at 'BBB'; Remains on Watch Negative
November 30, 2017 / 10:07 AM / 17 days ago

Fitch Affirms Wanda at 'BBB'; Remains on Watch Negative

(The following statement was released by the rating agency) HONG KONG, November 30 (Fitch) Fitch Ratings has affirmed Dalian Wanda Commercial Property Co. Ltd.'s (Wanda) Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and the ratings on its outstanding US dollar senior notes at 'BBB'. These ratings remain on Rating Watch Negative (RWN), on which they were placed on 6 October 2017. A full list of rating actions is at the end of this commentary. The affirmation follows evidence that Wanda's access to offshore funding remains open, after it obtained approval for a USD1.5 billion offshore note issuance quota by National Development and Reform Commission (NDRC). Wanda recently reached a preliminary agreement with its offshore syndicated loan lenders to repay a USD1.7 billion syndicated loan prior to its maturity in three instalments, before the end of May 2018. Wanda will have sufficient resources to refinance the syndicated loan, provided that it can successfully issue new US dollar notes before May 2018, or show that it has raised sufficient funds from other sources to pay for the second and final instalment of the syndicated loan. The company has paid the first instalment. The RWN reflects the continued lack of definitive funding channels in place to boost Wanda's offshore liquidity. Wanda's liquidity position may still come under substantial pressure if its offshore syndicated loan lenders make demands for early repayment and Wanda fails to meet these demands promptly. This can trigger the cross-default clauses in the USD1.2 billion in senior notes, potentially adding to repayment pressure. There may also be 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. The Rating Watch will be resolved when there is more certainty about on the company's ability to address its offshore liquidity needs. KEY RATING DRIVERS Early Repayment of Offshore Loan: Wanda has a preliminary agreement to repay the USD1.7 billion syndicated loan in three instalments of USD170 million by end-November 2017, USD510 million by end-March 2018 and USD1 billion by end-May 2018. Wanda has already paid the first instalment and has not indicated that it will negotiate new syndicated loans with its lenders to fund existing loan repayments; while it explores other funding options. Fitch expects Wanda to be able to repay the loans if it can raise USD1.5 billion via offshore senior notes issuance following the NDRC's approval of this amount of issuance quota. Uncertain Access to Onshore Funds: Wanda will have to rely on onshore funds to meet its offshore obligations if it fails to repay the syndicated loan or refinance its senior notes due November 2018 via offshore funding channels. Fitch believes that there is still uncertainty as to the timing of the approval from the State Administration of Foreign Exchange (SAFE) to remit funds offshore. Wanda may be forced to sell its offshore assets at unfavourable prices if the SAFE's approval to transfer its onshore cash overseas does not materialise before its obligations under the guarantees given to the syndicated loans fall due. Offshore Funding Options: Fitch believes that Wanda still faces regulatory risk that limits its offshore funding flexibility, although the company has other offshore funding options it can use before resorting to its onshore cash. Wanda has received approval to set up a cross-border capital pool account to service its offshore interest payment directly from onshore funds, which will improve Wanda's the operational efficiency of its offshore liquidity. At end-October 2017, Wanda had five overseas projects in the US, UK and Australia that have a combined investment cost of about USD5 billion, as well as three onshore projects held via its offshore entities. Wanda's equity interests in all of these projects can be offloaded to pay its offshore debts. To meet more immediate liquidity needs, Wanda can also pledge its 65% stake in its Hong Kong-listed subsidiary, Wanda Hotel Development Company Limited, which has a market capitalisation of USD850 million. Cross-Default Complications: Wanda's failure to resolve its immediate offshore debt obligations may lead to further repayment calls that will put pressure on its liquidity position. Wanda's USD1.2 billion in offshore bonds contain cross-default clauses that are likely to 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 are likely to 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 promptly and fully addresses its obligations to repay the portion of its offshore syndicated loan that has become due. Multiple-Notch Downgrade Risk: Further 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 CNY107 billion at end-September 2017. Wanda had total debt at end-September 2017 of CNY218.5 billion that we estimate will drop to around CNY200 billion, assuming the remaining proceeds from asset sales are received and used to pay down part of the onshore debt at end-2017. Bank and other loans, which are mostly secured borrowings, comprise over 60% of its total borrowings after the asset disposal, and maintaining access to these funding sources remains critical to supporting its ratings. 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) places it second behind US-based Simon Property Group, Inc. (A/Stable), and is higher than the USD1.6 billion EBITDA of France's Unibail-Rodamco SE (A/Stable) and Hong Kong-based Swire Properties Limited's (A/Stable) USD1.2 billion. Asset Sales near Completion: Wanda has received the full payment of CNY43.8 billion from the sale of Wanda City cultural and tourism projects to Sunac China Holdings Limited (BB-/Negative), and CNY16.6 billion of the total CNY19.2 billion from hotel sales to Guangzhou R&F Properties Co. Ltd. (BB/Rating Watch Negative) at end-October 2017. The asset disposals will be shore up Wanda's liquidity sufficiently to meet onshore debt repayment. DERIVATION SUMMARY Wanda's investment property scale is comparable to major global investment properties companies like Simon Property, Unibail and Swire Properties. 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 comparable with that of Simon Property, which 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 that of Swire Properties. Wanda's credit metrics are also 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. The multiple-notch rating difference between Wanda's ratings and those of these peers reflects its slightly weaker business and financial profile, and 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: - 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 The Rating Watch Negative will be resolved when there is more certainty about the company's ability to address its offshore liquidity needs. Developments That May, Individually or Collectively, Lead to Negative Rating Action, Including a Multiple-Notch Downgrade - Wanda shows signs of difficulty in repaying its offshore loans that are falling due; - Wanda is unlikely to meet its immediate offshore liquidity needs in a timely manner; - Wanda has poor funding access in the offshore bond market, either reflected in its difficulty in raising offshore bonds or in having to pay excessive costs to secure funding; - Wanda fails to refinance the full amount of the syndicated loan before May 2018. LIQUIDITY Liquidity Risk May Rise: Wanda's large liquidity position may still be insufficient if its total debt of more than CNY200 billion becomes due because of the cross-default clauses in various debt covenants are triggered, leading to acceleration of all of its debt. Wanda had around CNY107 billion in available cash at end-September 2017, while its short-term debt was around CNY25 billion. 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 affirmed at 'BBB', remains on RWN; -- Senior unsecured rating affirmed at 'BBB', remains on RWN Wanda Properties International Co. Limited -- USD600 million 7.25% notes due January 2024 affirmed at 'BBB', remains on RWN Wanda Properties Overseas Limited -- USD600 million 4.875% notes due November 2018 affirmed at 'BBB', remains on RWN Contact: Primary Analyst Andrew Chan Director +852 2263 9559 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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