July 20, 2023

China’s real estate sector, once a pillar of economic growth, is now grappling with a severe downturn, and the recent troubles of Dalian Wanda Group (DWG), the nation’s largest commercial property firm, have raised alarm bells across financial markets. Reports of financing troubles, credit rating downgrades, and imminent debt maturities have triggered a record slump in DWG’s bonds, sending shockwaves through the market.

On July 17, S&P Global delivered a significant blow to Dalian Wanda Commercial Management Group, a subsidiary of DWG, by downgrading its credit rating from “BB-” to “B+” and placing it on “CreditWatch negative.” This downgrade came after ongoing concerns regarding the planned Hong Kong listing of another DWG subsidiary, Zhuhai Wanda Commercial Management Group, which raised doubts about liquidity buffers. The rating agency cited greater uncertainties over Zhuhai Wanda’s initial public offering (IPO) as the primary reason for the downgrade. The situation has exacerbated DWG’s liquidity crisis and raised questions about its ability to meet its obligations, particularly a $400 million bond payment due later this month.

The imminent maturity of DWG’s $400 million bond has triggered volatile trading in the Asian high-yield bond markets. Initially, speculation that investors would be repaid led to a surge in the bond price. However, as concerns mounted over DWG’s cash position and repayment ability, sentiment quickly reversed, causing bond prices to plummet. The uncertainty surrounding DWG’s debt repayment has also negatively impacted the broader Asian high-yield dollar bond market, with Chinese issuers experiencing a seven-week low in average bond prices. This heightened market volatility has raised fears of contagion effects, potentially impacting other property developers and the overall financial system.

S&P Global’s second downgrade of DWG’s notes, this time lowering the rating to “CCC” from “BB-” for the $400 million 2023 bond due on Sunday, adds to the prevailing uncertainty in China’s property market. The rating agency highlighted an increasing risk of non-payment, estimating that DWG only has approximately $200 million in accessible onshore cash. These developments have compounded the lingering risks in the property market, which has been grappling with a downward cycle since the implementation of the “three red lines” policy to control industry expansion through leverage. As economic momentum weakens, prices of lived-in homes in China’s major cities have begun to decline, further dampening market demand and investor confidence.

Dalian Wanda Group’s mounting debt crisis and the ensuing market turmoil have underscored the deepening challenges facing China’s real estate sector. The implications of DWG’s financial woes extend beyond the company itself, posing potential risks to the broader property market and the country’s economy. As investors and policymakers closely monitor the unfolding situation, they face the daunting task of preventing further contagion effects and stabilizing the financial system. How the Chinese government responds to the property market crisis and navigates through these challenges will be critical in determining the trajectory of the nation’s economic recovery.

photo source: google

Delino Gayweh

Serrari Financial Analyst