Ratings agency Moody’s Investor Services has taken the knife to the massive China developer Dalian Wanda’s credit rating, cutting it to Ba1 amid concerns of the company’s weakened liquidity position.
The agency said this was “due to inadequate offshore cash to meet the potential repayment of its offshore bank loans of around $1.7 billion – arising from potential non-compliance of certain maintenance requirements related to the company’s existing borrowing obligations”.
Dalian Wanda is one of the larger property developers and investors globally and has begun to restructure its business, which includes two $1 billion Australian apartment projects at Circular Quay and on the Gold Coast, plus the Hoyts cinema chain.
It has also pulled out of a London land deal worth $761 million.
In a statement provided to Bloomberg and the Financial Times, Wanda said it would not be going ahead with the purchase of the 10-acre Nine Elms Square development site in the British capital, which was only agreed in June.
This comes as the Chinese government’s implementation of tight controls in major cities since September 2016 is starting to bite the developers very hard.
The measures are aimed at curbing residential price rises by dampening investment and speculative activity, and developers such as Dalian Wanda have been under pressure.
James Quigley, head of capital markets, Australia and New Zealand for Cushman & Wakefield, said in the first half of 2017, the largest source of foreign capital for Australian commercial real estate was now coming from investors from Singapore, while Hong Kong investors were responsible for recent landmark deals in both Australia and the UK.
“Despite the decline in investment from mainland Chinese, Australian commercial property investment volumes are on track for another robust year supported by investors from Singapore, Hong Kong, the US and Germany as well as local institutions such as Dexus and Charter Hall,” Mr Quigley said.
In early September, the group was forced to deny what it termed “malicious rumours” about its chairman, Wang Jianlin, and filed lawsuits in China amid a wave of uncertainty driven by Beijing’s crackdown on high-profile international deals.
According to Kaven Tsang, a Moody’s vice president and senior credit officer, While the company had around RMB137.7 billion of cash as of end-June 2017, an amount that can fully cover the potential repayment, most of the funds are situated onshore.
“Moody’s notes that DWCP does not currently have sufficient offshore cash to cover any prepayments in the event that offshore lenders ask for early repayment of loans,” Mr Tsang said.
“This heightened repayment risk reflects that the company has not proactively managed its offshore liquidity position, against the backdrop of a tighter control of cross border fund transfers out of the country. “
Mr Tsang said such weak liquidity and treasury management, in particular the mismatch in offshore cash resources to offshore debt payment obligations, no longer supports its investment grade profile.
To help offset the concerns, Dalian Wanda is selling its theme park assets to Sunac China Holdings and Guangzhou R&F Properties Co, and the company’s sizeable recurring rental income from its large and diversified portfolio of investment properties can support part of its ongoing funding needs and buffer debt repayment risks to some extent.
Mr Tsang added that downward rating pressure could emerge if the company fails to timely arrange funding to service its prepayment needs, which in turn results in an increase in liquidity and repayment risks.
Moody’s said a total of 14 developers, being 26.4 per cent of Moody’s rated Chinese property developers, had negative rating outlooks as of 27 September.
Mr Tsang said Moody’s expects the number of negative outlooks to decline modestly in the next six to 12 months as the credit profiles for certain rated developers will improve, supported by strong sales, improving margins and lower funding costs.