January 3, 2018 / 9:21 AM / a year ago

Fitch Downgrades Wanda to 'BB+'; Maintains Rating Watch Negative

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, January 03 (Fitch) Fitch Ratings has downgraded Dalian Wanda Commercial Property Co. Ltd.'s (Wanda) Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and the rating of its outstanding US dollar senior notes to 'BB+' from 'BBB'. Fitch has also maintained the Rating Watch Negative (RWN) on the ratings. A full list of rating actions is at the end of this commentary. The two-notch downgrade reflects Wanda's inability to access offshore funding channels to boost its offshore liquidity in a timely manner. This has heightened its offshore liquidity risk beyond levels commensurate with an investment-grade credit profile. The risk is exacerbated by the absence of approval from the State Administration of Foreign Exchange (SAFE) to transfer onshore funds offshore. Wanda's ratings are supported by its strong onshore business profile that possesses high operating cash flow visibility from its rental income. The RWN reflects the continued lack of definitive funding channels in place to boost Wanda's offshore liquidity. Wanda's liquidity position may come under substantial pressure if its offshore syndicated loan lenders demand for early repayment and Wanda fails to meet these demands promptly; or it fails to raise sufficient offshore liquidity to repay the USD510 million second tranche of its offshore syndicated loan due in March 2018. This could trigger the cross-default clauses for the USD1.2 billion in senior notes, and add 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 the company's ability to address its offshore liquidity needs. KEY RATING DRIVERS Difficulty Raising Offshore Funding: Wanda failed to issue offshore senior notes by the end of 2017 despite gaining the National Development and Reform Commission's (NDRC) approval for USD1.5 billion in issuance quota. The issuance quota expired at end-2017 and Wanda will have to apply to extend the quota before it issues offshore notes with maturity of over one year. The uncertainty over the timing of the NDRC approval raises Wanda's offshore liquidity risks. 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, but has not indicated that it will negotiate new syndicated loans with lenders to fund the loan repayments while it explores other funding options. Wanda's offshore liquidity is not sufficient to repay the principal of the syndicated loan, and it has to rely on offshore refinancing or transfer funds from onshore. 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 about the timing of the approval from SAFE to remit funds offshore. Wanda may be forced to sell its offshore assets at unfavourable prices if SAFE's approval to transfer onshore cash overseas does not materialise before its obligations under the guarantees given to the syndicated loans fall due. Overseas Market Exit: On 4 December 2017, Wanda announced its intention to sell its 65% stake in its Hong Kong-listed subsidiary, Wanda Hotel Development Company Limited, to Wanda Investment Holding Co. Limited, which is directly owned by Wanda's ultimate controlling shareholder, Mr. Wang Jianlin, at HKD1.2 per share, or a total consideration of over HKD3.6 billion. The transaction may boost Wanda's offshore liquidity provided Wanda receives payment offshore. However, this will eliminate some of the offshore funding options previously communicated to Fitch, such as disposing or pledging its equity interests in projects and subsidiaries. Fitch believes this is also a strong signal that Wanda is still under significant pressure to correct its previous aggressive expansion in the overseas market, and the company is likely to abandon its overseas expansion in the near future. 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. Risk of Multiple-Notch Downgrade: Further negative rating action may result 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 proceeds from asset sales were 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 total borrowings after the asset disposal, and maintaining access to these funding sources remains critical to supporting Wanda's ratings. Strong Onshore Business: 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/Rating Watch Negative) and Hong Kong-based Swire Properties Limited's (A/Stable) USD1.2 billion. DERIVATION SUMMARY Wanda's investment property business scale is comparable to major global investment properties companies like Simon Property, Unibail and Swire Properties. However, Wanda's recurring EBITDA/gross interest is less than 2.0x, compared with 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 rating is constrained by the lack of financial transparency at its parent, Dalian Wanda Group Co., Limited, which we estimate to have a materially weaker credit profile than Wanda. In addition, Wanda's early payment of its offshore syndicated loan and failure to take advantage of the USD1.5 billion offshore issuance quota in December 2017 has exposed Wanda to offshore liquidity risks that render its credit profile non-investment grade. 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 payables to decline 55% by 2019 - Dividend paid to average CNY5 billion a year over the 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 meeting its offshore liquidity needs or refinancing via offshore bonds by early March 2018; - Wanda fails to refinance the full amount of the syndicated loan before May 2018 or redeem the full amount of the USD600 million 4.875% offshore notes due November 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 payment for 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 downgraded to 'BB+' from 'BBB', RWN maintained -- Senior unsecured rating downgraded to 'BB+' from 'BBB', RWN maintained Wanda Properties International Co. Limited -- USD600 million 7.25% notes due 29 January 2024 downgraded to 'BB+' from 'BBB', RWN maintained Wanda Properties Overseas Limited -- USD600 million 4.875% notes due 21 November 2018 downgraded to 'BB+' from 'BBB', RWN maintained 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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