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How to Withstand China’s Property Meltdown

How to Withstand China’s Property Meltdown

Friday, 21 January, 2022 - 04:30

Before Jack Ma got into trouble with Beijing for his free-wheeling ways, there was Wang Jianlin.

Once China’s richest man, the founder of commercial real estate giant Dalian Wanda Group Co. was forced to unload trophy assets by the government after an acquisition spree that hit an estimated $16 billion in 2016 alone. The sales turned out to be a blessing in disguise now that China’s property market has slumped.

Wanda was besieged in 2017 when Beijing cracked down on companies’ global shopping sprees, suspicious that spending overseas was a way to take money out of China. Painful as it must have been, Wang sold hotels, including luxury residential projects in London, to Guangzhou R&F Properties Co. and his tourism and theme park holdings to Sunac China Holdings, a deal that bought him $9.4 billion.

Here’s the outcome of the urgent deleveraging: Wanda’s dollar bonds average a respectable 93 cents on the dollar. Compare that to the industry’s average of 53 cents for high-yield dollar bonds, data compiled by Bloomberg Opinion show. We can expect a whopping 26% default rate in 2022, if all issuers with a weighted bond price below 50 go into delinquency, according to Goldman Sachs Group Inc. estimates.

Three years on, Wang’s saviors need to be saved. Fitch Ratings recently downgraded Guangzhou R&F to “restricted default” after the developer convinced holders of a $725 million note to accept a six-month extension with sweeteners — and then changed course. The ratings firm called it a “distressed debt exchange.” Meanwhile, Sunac, China’s fourth-largest developer by sales, is struggling to pay its bills. It’s planning to sell its vast culture and tourism business, a big chunk of which came from Wanda. Its dollar bonds average 60 cents, according to Bloomberg data.

In contrast, the past year was not so bad for Wang. One trophy asset he retained was a controlling stake in AMC Entertainment Holdings Inc., which became a beloved meme stock. Wanda sold off its AMC shares, notching a gain of about $675 million, including dividends. Last summer, his commercial-property management firm, known as Wanda Light Asset Commercial Managementraised about $6 billion at a $28 billion valuation, when capital raising was already difficult for developers.

Wang Jianlin wasn’t alone in navigating the cratering property market following a showdown with authorities.

Consider Wang Zhenhua. The billionaire founder of Seazen Group is currently serving a five-year jail sentence for molesting a nine-year-old girl

— a crime that he has denied. The one thing he doesn’t have to worry about is his company. His 34-year-old son, Wang Xiaosong, is the chairman, and Seazen, which was upgraded by Moody’s Investors Service and S&P Global Ratings in early 2021, has avoided the ire of the bond market. Its bonds have held up better than average, at about 73 cents.

Before the scandal broke in July 2019, the developer had been growing much faster than its peers, driving up its leverage as well. Wang’s arrest created a key-man risk, forcing the Shanghai-based developer to scale back. For instance, Wang had been able to acquire complex residential and commercial projects for cheap, and had a wide range of contacts in the financing world. That edge disappeared when the founder was put behind bars. Seazen went into a conservative, self-preservation mode, while its peers binged on shadow financing.

In both cases, parting with prized assets and abandoning sales growth must have been painful. But the two Wang’s did it, and their shrunken business empires are still around. So here’s the lesson to the rest of the pack: Don’t hesitate to sell. Your goal is to survive.


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