Hong Kong, January 20, 2017 -- Moody's Investors Service has downgraded various ratings on Dalian Wanda
Commercial Properties Co., Ltd. (DWCP) and Wanda Commercial
Properties (HK) Co. Limited (Wanda HK).
The affected ratings are:
• DWCP's issuer rating has been downgraded to Baa3 from Baa2;
• Wanda HK's issuer rating of Baa3 has been withdrawn,
and the company has been assigned a Ba1 corporate family rating;
• The senior unsecured ratings for the bonds issued by Wanda Properties
Overseas Limited and Wanda Properties International Co. Limited
have been downgraded to Ba1 from Baa3. Both companies are wholly
owned subsidiaries of Wanda HK.
The rated bonds are guaranteed by Wanda HK and supported by deeds of equity
interest purchase undertaking and keepwell deeds between DWCP, Wanda
HK and the bond trustee.
The issuers of the rated bonds have maintained -- in interest
reserve accounts -- the equivalent of two periods of interest
payments on the bonds.
The outlooks on all ratings are negative.
This concludes the ratings review initiated on 6 January 2017.
RATINGS RATIONALE
"The downgrade reflects our expectation that DWCP's debt leverage will
rise while it accelerates implementation of its new business model to
increase its bulk sales of malls," says Kaven Tsang, a Moody's
Vice President and Senior Credit Officer.
"The downgrade also reflects our view that these bulk sales will increase
the company's business risk," adds Tsang, also Moody's Lead
Analyst for DWCP.
In 2015, DWCP implemented its bulk sales model, which involves
building and transferring malls. DWCP retains management of the
malls after transfer. So far, the volume of such transactions
has not been significant; for example, the company sold 20
malls to investors and connected parties in 2015 and 2016.
In the next few years, DWCP will step up execution of its new business
model, which entails the company substantially completing the development
of malls before it can then collect any cash proceeds from investors.
This means that the capital recycle for bulk sales of malls will lengthen
when compared with residential sales, in which the company can collect
presales proceeds at an earlier stage of development.
Moody's notes that DWCP will continue to generate presales proceeds
and revenues from the development of residential and commercial properties.
But their annual growth in the next 2 years will likely be nominal.
To prepare for the bulk sale of malls, the company has to build
up its inventory. Even though development cost per mall is estimated
at around RMB1 billion, the total for construction expenditure will
remain high in the next 1-2 years.
As a result, the company needs to raise more debt to fund its new
business model. Moody's expects DWCP will raise around RMB35 billion
of new debt in each of the next 1-2 years.
In this situation, DWCP's adjusted net debt/net capitalization is
likely to reach 45%-50% and EBIT/interest is likely
to decline to around 3.0x in the next 1-2 years, from
36.9% and 3.8x for the 12 months ended June 2016.
These levels of credit metrics are weak for the company's Baa3 issuer
rating.
Moody's also notes that the company's exposure to low-tier
cities remains high, with an estimated 40% of its land bank
for sales of properties (in gross floor area terms) in third-tier
cities.
If market liquidity tightens in 2017, DWCP's sales of residential
and commercial properties and its bulk sales of malls in the low-tier
cities will become more uncertain.
Moreover, its bulk sales of malls to investors are more volatile
than its traditional strata title sales of properties. Therefore,
it has a higher level of business risk in China's challenging retail
market.
DWCP's Baa3 issuer rating reflects its established brand name,
leading market position, nationwide operations, and track
record of developing and operating commercial properties in China.
Moody's points out that the growth of the company's rental income and
revenue from its leasing and management business is in line with expectations.
Moody's estimates that such non-development income had grown to
around RMB17-18 billion for the full year of 2016 and could cover
around 140% of its gross interest expenses for 2016.
Moody's expects such coverage will stay above 140% in the next
1-2 years. This coverage position is amongst the strongest
in Moody's rated Chinese property portfolio and supports the company's
investment grade rating.
In addition, the company's good access to the domestic bank
and debt capital markets supports its rating.
On the other hand, the company's weak credit metrics relative
to rated Chinese property peers constrain its rating.
The Baa3 issuer rating further factors in the risks of structural and
legal subordination, because the majority of its debt is situated
at the project company level.
Wanda HK's ratings have also been downgraded due to (1) the weakened ability
of its parent, DWCP, to provide support; and (2) its
own weak standalone credit profile.
Wanda HK's Ba1 corporate family rating includes a three-notch rating
uplift, based on expected strong financial and operating support
from DWCP.
Wanda HK's standalone credit profile reflects its weak credit metrics,
its short history, its roles as the group's core platform for offshore
funding and overseas investments, and the long-term development
nature of the company's existing projects.
The expectation of strong support is based on (1) Wanda HK remaining 100%
owned by DWCP and the latter exercising management control over Wanda
HK; (2) Wanda HK remaining the primary platform for DWCP's
offshore funding and international expansion; and (3) DWCP showing
a track record of extending support to Wanda HK's offshore bond issuances
through deeds of equity interest purchase undertaking and keepwell deeds.
DWCP's negative rating outlook reflects Moody's concerns over
the higher business execution risk associated with the company's
new business model and its weak credit metrics.
The negative outlook on Wanda HK's corporate family rating primarily reflects
the negative outlook on DWCP's issuer rating, given the close linkage
between the two companies in terms of credit quality and ratings.
An upgrade of DWCP's Baa3 issuer rating is unlikely in the near
term, given the negative rating outlook.
However, the rating outlook could return to stable if DWCP:
(1) meets its sales plans for both its traditional property development
business and its bulk sales of malls; (2) achieves growth in rental
and management fee income; and (3) improves its credit metrics,
such that adjusted net debt/net capitalization falls below 45%-50%,
EBIT/interest coverage rises above 3.0x-3.5x,
and rental and management fee income/interest stays above 130%.
On the other hand, DWCP's rating could be downgraded if: (1)
its contracted sales performance or growth in rental and management fee
income is weaker than expected; (2) it incurs a more-than-expected
amount of debt due to land acquisitions and slow contracted sales or collections
of the proceeds from its bulk sales of malls; or (3) its credit metrics
deteriorate on a sustained basis.
An indication of deterioration include the company's adjusted net
debt/net capitalization rising above 50%-55%,
EBIT/interest coverage falling below 3.0x, and, at
the same time, rental and management fee income/interest falling
below 125%-130%.
A weakening in liquidity, such that its cash balance falls below
1.5x of short-term debt on a sustained basis, or access
to bank funding weakens, would also weigh on its rating.
Additionally, any evidence of a material leakage of funds from DWCP,
or a notable deterioration in the company's corporate governance and transparency
could pressure its rating.
Upward rating pressure on Wanda HK's corporate family rating is limited
in the near term, given the negative outlook.
Nevertheless, the outlook could change to stable if: (1) DWCP's
rating outlook is revised to stable; and (2) Wanda HK successfully
executes its business plan and maintains its strategic and economic importance
to DWCP.
A downgrade of DWCP's rating will result in a downgrade of the ratings
of Wanda HK and Wanda HK's guaranteed bonds.
Furthermore, Wanda HK's rating could come under downgrade pressure
if its standalone credit profile deteriorates. Such a situation
would include (1) a failure to complete its overseas projects over the
next 3-5 years; (2) weaker-than-expected revenues
and operating cash flows; and/or (3) its total assets fail to trend
towards RMB25-30 billion by end-2017.
Any evidence of a reduction in the level of ownership held by DWCP,
or in the strategic and economic importance of the company to DWCP could
also be negative for Wanda HK's rating.
The principal methodology used in these ratings was Homebuilding And Property
Development Industry published in April 2015. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Dalian Wanda Commercial Properties Co., Ltd. (DWCP)
develops, operates and sells integrated properties in China,
including shopping malls, offices, houses and hotels.
It is one of the largest property companies in China with contracted sales
of RMB164 billion in 2015.
Wanda Commercial Properties (HK) Co. Limited (Wanda HK) is the
core offshore funding and investment platform for DWCP. It is also
a wholly owned subsidiary of DWCP. Its main assets include a 65%
equity interest in Hong Kong-listed Wanda Hotel Development Company
Limited (unrated), as well as investments in five overseas property
and hotel projects in the UK, Australia and the US.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Kaven Tsang
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
