Wanda Commercial Downgraded To #BB#, Subsidiary To #BB-# On Uncertainty Over Strategic Outlooks Negative

Stocks and Financial Services Press Releases Thursday September 28, 2017 16:09
HONG KONG--28 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 28, 2017--S&P Global Ratings lowered the its long-term corporate credit rating on China-based property developer Dalian Wanda Commercial Properties Co. Ltd. (Wanda Commercial) to 'BB' from 'BBB-'. We also downgraded Wanda Commercial's 100% owned subsidiary Wanda Commercial Properties (Hong Kong) Co. Ltd. (Wanda HK) to 'BB-' from 'BB+'. The rating outlooks on the two companies are negative. Further, we downgraded our rating on the senior unsecured notes guaranteed by Wanda HK to B+ from BB. We also removed all these ratings from CreditWatch, where they were placed with negative implications on July 17, 2017.

We lowered the ratings to reflect the uncertainty over Wanda Commercial's change in business model following the company's abrupt decision to sell the bulk of its property development projects and its entire hotels portfolio in July 2017. We expect Wanda Commercial's market position in its property development segment to weaken following the transition. Moreover, the prospects of the company's "A-share" listing are unclear, and information risks have heightened.

We believe there are lingering risks related to further shifts in Wanda Commercial's business strategy. The company's appetite for expansion is likely to stay high and it lacks strategic clarity and predictability, in our view. Although the company has mentioned that it will focus on its commercial property segment, it has had swift changes in its business and financial goals over the past few years. While Wanda Commercial emphasized an asset-light model, it also significantly expanded its cultural and tourism projects. This expansion required large capital outlays, resulting in higher financial leverage in the past two years. Similarly, despite disposing of projects at book value, Wanda Commercial is again in negotiations with the Gansu provincial government for a potential new cultural and tourism project in the city of Lanzhou.

Wanda Commercial's sale of the bulk of its land reserves will weaken its market position and competitive advantage, in our view. The success of the company's commercial investment portfolio has been underpinned by the strong cash generation of its property development business as its commercial properties mature. In addition, we believe that Wanda Commercial's comparative advantage to directly negotiate with local governments for mixed-use land plots at low costs may weaken.

We believe Wanda Commercial's large and stable rental income and increasingly seasoned rental portfolio continue to be key strengths for the company. Wanda Commercial has the largest portfolio of shopping malls in China and an above-average yield due to its low land costs. The operating performance of the company's malls remains solid with very strong occupancy.

We believe the recent large asset sales will benefit Wanda Commercial's near-term liquidity and debt repayment capability. However, the company does not have a clear debt reduction plan, in our view. We expect Wanda Commercial to maintain a high debt and strong cash balance in the near term. The high cash balance could enhance the company's financial flexibility for unexpected situations and provide greater capacity for new investments.

We expect the long-term impact on Wanda Commercial's debt leverage to be largely neutral. That's because high construction expenditure for its undelivered residential projects, high capital expenditure for its large pipeline of commercial properties, and reduced cash flow from property sales will offset the lower borrowings. In our base case, we forecast that the debt-to-EBITDA ratio will moderately improve to 4.0x-4.5x in 2017 and 2018, from around 5.5x in 2016. We have offset the borrowings with 25% of surplus cash to reflect the company's transition to a less capital intensive and less restricted funding model.

In our view, Wanda Commercial's untested financial policy and risk tolerance remain a key event risk, particularly the use of cash--for expansion in other segments, for reentering into property development, or for other purposes. Despite an increase in the company's cash position to Chinese renminbi (RMB) 137 billion in the first half of 2017, total debt also grew by a similar magnitude to RMB279 billion, from RMB224 billion at the end of 2016.

In addition, we believe Wanda Commercial's access to funding could weaken as policymakers in China clamp down on highly leveraged companies with aggressive expansions overseas. Lenders could turn cautious on such companies. Also, Wanda Commercial's funding cost will likely have risen, as reflected in the significant rise in its bond yields since July 2017.

Information and governance risk for Wanda Commercial is likely to increase if the company's IPO fails to materialize in 2018. Although Wanda Commercial continues to publish financial information on a regular basis, it operates as a private company, but without any disclosure from its parent. If the relisting plan does not materialize, we see increased risks that the parent will extract value from Wanda HK if its own financial position weakens. In addition, investors who participate in the privatization may choose to exercise their right to exit the investment with predefined returns, for which Wanda Commercial may need to distribute cash for the buyback.

We continue to assess Wanda HK as a highly strategic subsidiary of Wanda Commercial. The rating on the subsidiary is therefore one notch lower than that on Wanda Commercial.

The negative outlook on Wanda Commercial over the next 12 months reflects: (1) the increased risks related to the company's access to funding; (2) the lack of visibility on its IPO; and (3) although less likely, a possible early redemption of the company's debt due to failure to secure waivers.

The outlook on Wanda HK reflects the outlook on Wanda Commercial and our view that Wanda HK will maintain its highly strategic status to the parent.
We could lower the rating if Wanda Commercial has any difficulty in obtaining borrowings at a reasonable cost.

We may also lower the rating if the company's listing does not materialize in the next six-12 months, because prolonged private ownership will likely increase information and governance risks. Also, continued limited and infrequent information disclosure could result in a suspension of the rating.

We may also lower the rating if Wanda Commercial's property sales deteriorate more rapidly than we expect, or the company increases its capital expenditure and continues aggressive expansion in commercial property development or in other non-core segments. The ratio of debt to EBITDA deteriorating and staying above 5x would indicate such weakness.

We may revise the outlook to stable if Wanda Commercial's access to funding stabilizes, its contingent obligations such as early repayment of offshore syndicated loan are resolved, and the company completes the IPO in the next six-12 months.


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