Daily Management Review

Behind One Of China's Largest Property Deals Ever, There's A Strange Accounting Trick


07/14/2017




Behind One Of China's Largest Property Deals Ever, There's A Strange Accounting Trick
In what is one of the largest Chinese real estate deals ever made, Sunac, a Chinese property developer is buying a bunch of its theme parks and hotels from major Chinese conglomerate Dalian Wanda for $9.3 billion.
 
And the interesting part is that in order to close the deal, Wanda is lending nearly half of the total sale figure to Sunac.
 
Coming after the deal was announced Monday and summarized with one sentence in a Sunac filing to the Hong Kong stock exchange, it’s an odd way to finance the sale, and details remain scarce.
 
Sunac will be lent the money by Wanda which will secure a three-year bank loan of 29.6 billion yuan ($4.36 billion). According to a stock exchange filing, to take ownership of the properties, Sunac will use that money to pay Wanda the remainder. While neither has clarified the amount involved, both companies have said Sunac will take on all loans associated with these assets. And Wanda will still be paid management fees for managing and operating the properties that remain under its brand, although Sunac will have ownership.
 
And since Wanda is ponying up the money and securing the loan itself, it appears that Sunac isn't taking on debt to make the purchase — except, of course, from Wanda.
 
Light on the kind of numbers magic that companies can perform is shed by the deal. All Wanda has, for instance, is the bank loan it took out to advance money to Sunac, which is now taking on the property and related leverage and Wanda no longer has to record debts associated with those theme parks and hotels.
 
Beyond back-of-the-envelope calculations, it's difficult for experts and shareholders to surmise the exact nature of the deal without further details. This financing detail has raised red flags for some as it is unusual.
 
Because of its plan to acquire the Wanda assets, Sunac would be downgraded to BB- and put the company on rating watch negative by Fitch Ratings, the agency said on Thursday. The deal "will put pressure on Sunac's leverage over the next 12 months," Fitch said in a statement.
 
The ratings agency estimated based on Wanda's public disclosures that the acquisition prices, plus debt to be acquired, is "almost as large as Sunac's net adjusted debt of 89 billion yuan at end-2016."
 
Given the Wanda acquisition, and an earlier $2 billion investment into flailing Chinese tech firm LeEco, Sunac's corporate credit rating was placed under CreditWatch negative earlier in the week by S&P Global which also sounded alarm bells against Sunac.
 
"Sunac's financial leverage could further deteriorate following the large land acquisitions and expansion in the non-core segments," the ratings firms said.
 
Wanda would be able to repay many other loans and would be able to reduce its debt pile by the deal with Sunac in the long run, Wanda has said.
 
Corporate finances and loans to companies like Wanda that have made marquee overseas acquisitions are being more closely scrutinized by the Chinese authorities and the move is coming amidst such an environment. There is little transparency over Dalian Wanda’s debt because it is a private firm.
 
(Source:www.cnbc.com) 






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