RPT-Fitch Rates Wanda's USD Notes Final 'BBB+'
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Jan 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Wanda Properties International Co. Limited as (Wanda Properties) USD600m 7.25% guaranteed bonds due 2024 a final a€˜BBB+a rating. The notes are unconditionally and irrevocably guaranteed by Wanda Commercial Properties (Hong Kong) Co., Limited (Wanda HK), a wholly owned subsidiary of Dalian Wanda Commercial Properties Co., Ltd.as (Wanda; BBB+/Stable).
In place of a guarantee, Wanda has granted a keepwell deed and a deed of equity interest purchase undertaking to ensure that Wanda HK and Wanda Properties have sufficient assets and liquidity to meet their respective obligations for the senior notes. Wanda has also introduced a standby facility under the keepwell deed to provide Wanda Properties with sufficient liquidity to meet its obligations for the senior notes.
Wandaas ratings are supported by its strong and growing recurring cash flows from its investment property portfolio of 85 retail malls and 54 hotels across China. Its total GLA of 7.9m sqm at 31 December 2013 makes it the largest commercial landlord in China.
The companyas flagship developments, called Wanda Plaza, enjoy high occupancy rates and continued rental rate growth and always open with 100% occupancy, reflecting managementas strong execution capabilities. Wanda has a well-established brand and is likely to continue benefitting from Chinaas urbanisation and income growth.
KEY RATING DRIVERS
Unique Business Model: The rapid increase in the number of Wanda Plazas from 33 in 2010 to 85 in 2013 is largely funded by development property sales. In general, retail malls and hotels take up 15% to 20% of each Wanda Plazaas gross floor area (GFA) while the rest are development properties. This business model has driven Wandaas rental and property management income to grow at almost CNY2bn a year to CNY7.55bn in the 12 months to June 2013, at a CAGR of 67.7% since 2010.
As both cash and debt are fungible across the businesses, Fitch has made several assumptions in Wandaas ratio calculations. All cash and debt that support 30% of development inventory (net of pre-sales proceeds) are allocated to the development business. The 30% ratio is in line with the trends for large Chinese homebuilders. Residual debt is allocated to the investment property business. Proven Track Record: Wandaas track record of timely delivery of projects, high occupancy rates and continued rental rate growth reflects managementas strong execution capabilities. It has a well-established brand that allows it access to choice locations for new projects and partnership with high-quality tenants. These factors also give support to its property sales.
Improving Long-Term Financial Profile: Fitch expects Wandaas cash flow and leverage profile to improve in the long run as its investment property business reaches steady growth while its development propertiesa scale and debt level plateau. Wandaas strong expansion of its investment property portfolio, where revenue grew 59% and 96% in 2012 and 2011 respectively, contrasts with a slower increase in development property pre-sales of 12% and 37% for the same periods. This steady state is likely to happen after 2016. The continued growth in the investment property business has helped to rapidly improve the ratio of Wandaas investment property EBITDA to interest to 2.2x in 1H13 from 1.9x and 1.6x in 2012 and 2011 respectively. These measures strongly support the ratings.
Significant Medium-Term Capex: Wandaas credit strengths are tempered by its significant capex under an aggressive plan to open 25 to 30 Wanda Plazas annually. Fitch expects Wanda to generate negative FCF as long as its investment properties under development exceed 20% of its total investment properties; even as it achieves substantial properties sales.
Vulnerability to Market Shocks: Fitch expects Wanda to face tighter liquidity due to working capital outflows in the event of a sharp downturn in sales. Wanda has limited flexibility in deferring construction expenditure for both its capex and development properties already sold. However, such market shocks in the past, such as the one in 2008, were short lived.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- investment property debt/recurring EBITDA sustained below 5.0x (7.9x in 1H13);
- investment property to interest sustained above 3.0x;
- investment properties under development as a percentage of total investment property sustained below 20%;
- sustained positive free cash flow;
- stabilisation of landbank inventory, indicating a steady-state in development activities.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- investment property debt/recurring EBITDA sustained above 7.0x;
- investment property EBITDA to interest sustained below 2.0x;
- unsecured assets/unsecured debt sustained below 2.5x (4.0x in 1H13) may lead to a negative action on the senior unsecured debt.
As Wanda remains a privately owned company, prompt information disclosure is necessary to monitor the ratings.
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