The great unwinding has begun. Driven by overstretched balance sheets and a government crackdown on lavish overseas spending, China’s two biggest corporate shoppers, Dalian Wanda Group and HNA Group, are set to go on a selling spree. And early indication are that we are about to see a fire sale.
Speaking Monday as his company announced results, Wang Jianlin, CEO of Dalian Wanda said the company he heads "will resort to every financial tool to reduce debt, including the disposal of non-core assets."
Indeed, Wanda has already shown it is ready to sell, and even take a loss on its investments. Dalian Wanda Group agreed to sell its London luxury development project, One Nine Elms, for 59 million pounds (US$81 million), marking a 34% decline from its original purchase price a mere four years ago.
“As Wang Jianlin has now shown, losses can be tolerated, and it’s reasonable to assume that even the most-high profile of recent acquisitions is now available,” said Brock Silvers, founder of Kaiyuan Capital, a Shanghai and Hong Kong-based investment advisory firm.
Meanwhile, HNA said on Friday it had hired banks to look for buyers of its majority stake in Spain’s NH Hotel Group. And last week, three HNA entities were all halted from trading as the company prepares for a major announcement regarding its refinancing plans.
Both Dalian and HNA are motivated seller.
Dalian Wanda Commercial has agreed with banks to make early repayments on its offshore syndicated loans after a rating downgrade last year, of which US$510 million will be repaid by March. To make that payment, more sales will have to happen.
“Selling its London project will help Dalian Wanda Commercial to raise its offshore liquidity, but the amount is not enough for its offshore debt repayment," S&P Global Ratings associate director, Dennis Lee, told China Money Network.
HNA has built up its massive debt over the past few years with aggressive acquisitions. As of end of last August, HNA spent RMB15.6 billion (US$2.4 billion) on interest, more than any other non-financial firm, listed or unlisted, in China. HNA’s credit rating was reduced last November to B, five levels below investment grade B+ by S&P, due to China’s tightening oversight and HNA’s rising funding costs.
The crisis appears to be worsening. HNA’s CEO Adam Tan has suddenly decided not to attend Davos economic summit, which is to be held January 23 to 26 in Switzerland. Instead, Tan has reportedly issued a memo to all staff warning them that the company plans to cut costs "dramatically" and urged employees to cut down on unnecessary expenses.
The problem is that just as these Chinese corporations are setting out to sell off assets, namely real estate in the U.S. and U.K., these markets are starting to show signs of weakness. In 2016, Chinese outbound real estate investments increased by 56%, reaching US$28.2 billion. China also became the largest cross-border real estate investor, overtaking the United States. The Chinese were 25% of buyers of central London commercial property in 2016.
In London, house prices in central London dropped sharply in 2017, according to data from housing market consultancy LSL Acadata. In the borough of Southwark, prices dropped 21.1% last year to November 2017, while in the city of Westminster prices dropped 19.4% during the same period.
In the U.S., commercial real estate prices were flat in 2017 for the first time since 2010, with indications of falling prices in 2018.
"Those large sales are often challenging since many Chinese buyers overpaid in London, New York and Australia," said Colin Bogar, CEO and founder at Property Passbook, "So the ease of finding buyers at the right price depends on the city. Some of these sales will likely be at a loss."
Likewise for entertainment. In 2012, Dalian Wanda acquired a 75% stake in U.S. based movie theater chain AMC Entertainment Holdings for US$2.6 billion. Today, AMC has a stock market capitalization of US$1.6 billion, indicating a paper loss of US$1.3 billion for Dalian Wanda.
But with Beijing breathing down the neck of corporate China to cut debt, the sales look set to continue. Corporate debt in China is the largest compared to international peers. Bank for International Settlements (BIS) data shows that China’s corporate debt was as high as 65% of total debt as of the end of 2016. The average level for advanced economies and developing economies is 32% and 57%, respectively. And given that most of the major offshore acquisitions were funded by onshore borrowing, Beijing has become alarmed at the resulting capital flight.
HNA and Dalian Wanda will likely be joined by others eager to sell assets. Anbang Insurance’s signature purchases included a US$1.95 billion purchase of the Waldorf Astoria Hotel in New York in 2015, and US$6.5 billion acquisition of Strategic Hotels & Resorts Inc in 2016.
“This trend should accelerate in 2018 as plans turn to actions, and I look for a series of completed divestitures,” said Silvers, at Kaiyuan Capital. “All of this indicates how seriously China Inc. is taking Beijing’s command to solidify balance sheets.
“Until Beijing is satisfied, smart buyers would simply target their preferred assets and hope that sellers are sufficiently incentivized to strike a deal,” said Silvers.