Investors seek profit in Wanda sell-off

Banks may be curtailing their credit lines, but some bond investors view Wanda's recent rollercoaster ride as an opportunity to generate alpha.

Contrarian bond investors are hoping to take advantage of Wanda Group’s recent financial and political difficulties, betting that downside risks are containable and relatively short-term.

“There are always political shades of grey when it comes to emerging markets investment,” one US-based fixed-income fund manager told FinanceAsia. “Do we freak out? No. But we hope others freak out because we’re investing for the long term.”

This high-risk strategy comes at a time when the group’s bond prices have been on a volatile ride thanks to heightened regulatory uncertainty in China where the government has been cracking down on the debt-driven acquisition strategies of some of the country’s largest conglomerates including Fosun and HNA Group.

It started bursting into the open on June 20 when the China Banking Regulatory Commission (CBRC) summoned banks to inform them that the Central Committee of the Communist Party of China and China’s State Council did not consider six of Wanda’s recent outbound acquisitions to be in line with the nation’s investment policy.

Rumours about this meeting triggered an initial steep sell-off across Wanda’s bond complex. This hit its second run at the beginning of this week when a memo relating to the meeting began circulating among the financial community.

According to the memo, local banks are not allowed to provide financing in relation to the acquisitions, nor can Wanda pledge acquired assets as collateral for financing.

The document started to disappear from circulation almost as soon it appeared on July 17. Notably, only the first page of the memo was circulated, and that did not appear to be carrying an official chop.

Nevertheless, local banks told FinanceAsia they have been cutting the group’s credit lines since the end of 2016.

“We stopped giving any new credit lines to Wanda late last year,” said one credit analyst, who works on a team making lending decisions at one of the big four state owned banks.

He added that the bank’s “current credit exposure to Wanda concerns us,” because the bank is conscious that all its peers have been curtailing their lending to Wanda as well.

A second banker at one of China’s big four banks affirmed that his bank also stopped providing any new credit facilities to Wanda “around the end of last year” due to concerns about Wanda’s acquisition strategy.

A rollercoaster ride, but not in a Wanda theme park

In China’s domestic bond market, Wanda’s four renminbi-denominated bonds, listed on the Shanghai Stock Exchange, fell during Tuesday and Wednesday this week, wiping out about Rmb4 billion ($590 million) in value.

The Baa3/BBB-/BBB rated company’s offshore bonds have also resumed a downward slide. The group has two benchmark dollar bonds in the name of Wanda Properties Overseas, both carrying ratings of Ba1/BB/BBB.

The group’s longer-dated 7.25% January 2024 bond had been trading around the 111.86% mark shortly before the CBRC issued its first summons in June. It immediately fell 9.5 points to the 102.29% level once news broke, before recovering to a recent high of 106.35% on July 11.

However, it suffered a second five-point lurch downwards on Tuesday, closing the day at 99% before dropping a further half-a-point on Wednesday.

Similarly, the group’s 4.875% November 2018 bond was trading around the 101.74% mark on June 21, before dropping three points to the 98.71% level on June 22. This week, it dropped one-and-a-half points on July 18 to the 97.26% level, before recovering slightly on Wednesday to the 97.95% level according to one broker’s estimates. 

The 'CBRC memo' on Wanda

Some foreign fund managers take the view that Wanda has fundamentally sound financials, which have become lost amid the political noise.

They believe markets are likely to stay volatile and further big falls cannot be ruled out. But they also argue that the recent slump in Wanda’s bonds presents an opportunity to pick up what they view as relatively lowly priced assets.

“We see great opportunities to get into some of the names, which are under political scrutiny because of their overseas investments,” the US-based fund manager told FinanceAsia.

“Portfolio managers aren’t assuming these companies will go bust just because they’re viewed as not being politically supportive of the national good right now,” the investor added.

A second Singapore-based fund manager also commented that, “Investors aren’t surprised by the crackdown as these acquisitive firms have been loading up with debt. The best outcome from such a public imbroglio will be a bit of bad publicity, plus diminished access to the capital markets and at a higher cost.”

Limited transparency

One of the main issues investors face is a lack of transparency at both a political and financial level. In a recent research report, JP Morgan warned that the 2016 privatisation of Dalian Wanda Commercial Properties “lowered the company’s transparency and potentially weakened financial controls and corporate governance”.

Likewise, in its recent monthly Asian bond market overview, HSBC said investors’ ability to assess Chinese corporate creditworthiness is “becoming more complicated by the stifling regulatory forbearance on various businesses".

Shenyin Wanguo Securities makes a similar argument. On Tuesday, it said investors were becoming concerned about the fallout from regulatory action on market liquidity.

It concluded that the government’s focus on offshore acquisitions marks a “major shift in the regulator’s attitude because now the capital is unsafe even if it’s outside of China.”

On Monday, Standard & Poor’s responded to recent events by putting Wanda Commercial and Wanda Hong Kong’s BBB- ratings on negative outlook, citing the group’s unexpected sale of its property and tourism business to Sunac China.

“The reduction in property development sales and earnings could offset the impact of potential debt reduction from the sales proceeds,” S&P said. “The reduction of Wanda Commercial's land reserves will likely reduce its market position compared with its large developer peers.”

The US-based investor also noted that, “In the event they write down some of their purchase assets, the equity shareholders' value may be affected,” the US investor said.

Last week, Wanda, controlled by China’s richest man Wang Jianlin, announced that it was selling 76 hotels and 13 cultural and theme park to Sunac China Holdings for Rmb63.17 billion ($9.28 billion) to strengthen its balance sheet.

Then this Wednesday, Guangzhou R&F Properties, one of China's largest property developers, said it was buying 77 hotels from Wanda for Rmb 19.9 billion ($2.94 billion). This means that Sunac will now only acquire the tourism assets for Rmb43.8 billion from Wanda and bear about Rmb45.4 billion of loans after the deal. 

Hong Kong-traded shares in Sunac bounced back on Wednesday, rising 7.9% after a 7.3% decline a day earlier. Shenzhen-traded shares in Wanda Film Holdings have been suspended from trading since July 3, citing a major announcement.

On a brighter note, Hong Kong-listed Wanda Hotel Development surged 28% on Wednesday, ending a two-day decline since Monday.

The National Development Reform Commission also stepped in on Wednesday, noting that the economic planning agency was closely watching irrational overseas investments in sectors including property, hotels, movie studios, entertainment and sports clubs.

“Chinese corporates should consider their offshore investments very carefully, as regulators need to prevent the risks of investing aboard,” a NDRC spokesman said in Beijing.

Wanda’s other foreign acquisitions include its $3.5 billion purchase of Legendary Entertainment, a US film production company, the $1.2 billion purchase of AMC Entertainment and a 20% stake in Atlético Madrid.

A Wanda spokesperson did not respond to an email enquiry asking about the memo, which began circulating this week. The CBRC also declined to respond to questions about the memo’s veracity.

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