Real Estate in China

Even China Evergrande Group would be ashamed of the quick and furious decline it experienced. The largest shopping mall operator in the nation, Dalian Wanda Commercial Management Group Co, issued $800 million in bonds earlier this year. Since a record-breaking wave of defaults in 2022, this developer with a junk rating was the first to succeed in accessing the offshore market. Wanda’s February issue was still trading at roughly 40 cents to a dollar by the end of May, and investors have still not received a single coupon payment.

When Wanda announced that its planned Hong Kong IPO of its property management subsidiary would not take place anytime soon, alarm bells began to go off in late April. The company claimed that China’s stock watchdog required more time to implement comprehensive equity-raising laws for real estate developers. In recent months, Wanda has given investors the idea that Zhuhai Wanda Commercial Management Group Co’s IPO was close at hand.

Wanda will be required to refund its pre-IPO investors, who invested around two years ago, approximately 40 billion China yuan ($5.6 billion), if the share sale does not go public by the end of the year. This uncertainty puts Wanda in a difficult situation right away: According to Fitch Ratings, the developer had 22 billion yuan in bonds due in the next year and owned 28 billion yuan in cash as of March.

As a result, according to Debtwire, the company has begun asking its Zhuhai Wanda investors, such as Hong Kong-based private equity firm PAG, to modify their conditions and postpone their rights by two years. The developer is accelerating asset sales in the interim.

This well-worn strategy conjures up unpleasant memories. The largest builders in China had hoped that stock raisings would enable them to reduce their debt, but this was not the government’s favored approach. Instead, Beijing wants to see them reduce their balance sheets. In a pre-IPO finance agreement, Evergrande, for example, pledged to secure approval for a backdoor listing in Shenzhen China by early 2021 or face paying back 130 billion yuan.

The outcome was not favorable. The regulator did not approve Evergrande.

So, will Wanda fare much better? Will its pre-IPO investors accept a delay or withdraw their funds immediately? Most of Evergrande’s supporters were loyal as of late 2020. Two-thirds of the financing, or investors holding equity shares worth about 86 billion yuan, agreed to forego their right to demand prompt repayments. Now that they are caught up in a complicated restructuring, some must be experiencing buyers’ regret. One is suing for compensation at a nearby court. According to the local newspaper Caixin, Country Garden Holdings Co., one of Zhuhai Wanda’s investors, is averse to term changes.

In the meantime, Wanda’s governance is becoming more hazy, much like Evergrande. Dalian Wanda Group, the parent company with higher debt, has been using the mall owner’s cash reserve. At the end of 2022, the property development arm of its company had account receivables of 13.6 billion, up more than five times from 2.1 billion six months earlier. Wanda’s credit rating was reduced by Moody’s Investors Service last month, with more related-party transactions listed as one of the reasons.

It’s also possible that asset transactions won’t go as smoothly as founder Wang Jianlin would prefer. According to Bloomberg News, Wanda was considering selling up to 20 shopping centers in affluent regions of China like Shanghai and Zhejiang province. However, Caixin claims that due to minimum holding periods, Wanda had agreed to at the time of the land purchases, certain properties can’t be sold off that simply.

Wang has a proven track record of turning around businesses, it’s true. In 2017, Wanda was victimized by Beijing’s crackdown on its international buying binges, along with HNA Group Co and Anbang Insurance. In a $9.4 billion agreement, Wang was able to save Wanda from going bankrupt by selling her hotels to Guangzhou R&F Properties Co. and her theme park and tourism projects to Sunac China Holdings Ltd. Having done it once, one may assume Wang is more determined than Hui Ka Yan of Evergrande to part with his most valued possessions.

However, Evergrande and Wanda have a lot in common. Both are in declining industries, with opaque governance providing little protection for investors and drawn-out asset sales. But more crucially, the two developers are engaging in what the China now refer to as “the original sin” by operating as private companies in a society that values state-owned corporations. Wang will require more fortitude and finesse than in 2017 to overcome this round of liquidity concerns.

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