Analysts question probity of purchase agreement

By Li Xuanmin Source:Global Times Published: 2017/7/13 23:53:40

Actors bring to life an ancient battle at a cultural tourism complex operated by Wanda in Hefei, East China's Anhui Province. File photo: IC

Dalian Wanda Group's move to offer a sizable loan to Tianjin-based property firm Sunac China Holdings so that it can acquire $9.3 billion worth of Wanda's tourism assets and hotels has sparked widespread controversy in recent days.

Some analysts questioned whether the move is a form of transforming equity financing into a kind of debt arrangement, while others said that it only reflects Wanda's desire to close the deal and find an exit from its real estate assets.

Wanda announced on Monday that it will sell 91 percent of its 13 tourism assets as well as 76 hotels to Sunac in a deal worth 63.18 billion yuan ($9.3 billion). But the property conglomerate is lending Sunac 29.6 billion yuan, nearly half of the total amount, to push the deal through, according to a filing by Sunac with the Hong Kong Stock Exchange on Tuesday.

"Wanda shall secure a three-year loan of 29.6 billion yuan through designated banks and advance the borrowings to Sunac," the filing said.

This appeared to run contrary to what Sunac Chairman Sun Hongbin said in an interview on Monday with financial news portal Caixin: "The funds involved in the deal all came from the company's own capital pool," Sun was quoted as saying.

This kind of vendor financing is "quite rare" in equity transfers, most of which are generally aimed at clearing the relevant goods and proceeds within a short time, Yan Yuejin, research director at Shanghai-based E-house China R&D Institute, told the Global Times on Thursday. 

"It's as though you are selling your apartment to your neighbor, but are lending the money to him so that he can make the purchase," he explained.

Some market analysts pointed out that the transaction looks a bit like a kind of deal sometimes practiced in shadow banking, known as "fake equity, real debt," which classifies a loan as equity but requires investees to buy back the "equity" along with a fixed dividend within a specific date.

In Wanda's case, although Sunac has acquired the ownership, the transferred cultural and tourism assets will still use the Wanda brand, and Wanda is responsible for their construction, operation and management. The company will also receive consulting and management fees from Sunac every year, according to a statement the company sent to the Global Times on Monday.

"It is hard to rule out the possibility of 'fake equity'," an industry insider who wished to remain anonymous told the Global Times on Thursday.

Market overreaction?

But Hui Jianqiang, research director with real estate information provider Beijing Zhongfangyanxie Technology Service, said that the market has overreacted to the news.

"It's simple - in Wanda's eyes, Sunac is a good buyer based on its acquisition record. It simply does not have sufficient capital," Hui told the Global Times on Thursday. 

Besides, the loan will not register as debt in Wanda's balance sheet, Hui said.

"The proceeds will add further liquidity to the 100 billion yuan of cash the company had at the end of 2016, and will be used to fund the company's operations and repay its existing debts, which totaled 224 billion yuan at the end of 2016," Kaven Tsang, Moody's vice president and senior credit officer, said in a note sent to the Global Times on Thursday.

Wanda's eagerness to complete the deal also suggests that it is in a rush to shed its real estate assets, Yan said.

"Since delisting from the Hong Kong bourse last year, Wanda's financing channels have been limited so it is looking to get listed in the A-share market," Yan said.

"But IPO applications by property firms have almost halted in the Chinese mainland, so spinning off its property business is vital for Wanda's listing prospects," noted Yan.

Another factor is that China's property market has slowed down recently amid tightened government control, experts said.

"As an industry giant, Wanda's decision will have a huge influence on other players' future expansion strategy, and may herald the end of the 'asset-heavy' era," Hui said.

Hui predicted that a wave of commercial real estate developers will spin off their property assets in the future. "In this way, capital can be recycled."

Newspaper headline: Wanda, Sunac deal sparks controversy

Posted in: COMPANIES

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