Deal with Dalian Wanda raises Sunac's financial risk: Moody's
Sunac China Holdings' proposed acquisition of assets from Dalian Wanda Commercial Properties could have the effect of keeping Sunac's debts at an elevated level, Moody's has warned. "The proposed acquisition … will substantially increase its operating scale and land bank. However, the transaction will also raise its financial risk and keep its debt leverage elevated, as it plans to partly fund the transaction with debt," said Moody's Franco Leung. Ratings for the property developer may come under pressure if its liquidity deteriorates or if its debt leverage remains high, added Moody's.

Sunac China Holdings's proposed deal to acquire assets from Dalian Wanda Commercial Properties, could keep Sunac's debt leverage at an elevated level, Moody's Investors Service said.

The transaction will not immediately impact Sunac's B2 corporate family rating, its B3 senior unsecured rating or the negative outlook on the ratings, the agency said.

"The proposed acquisition – Sunac's largest ever, equivalent to 81 percent of its gross land bank at end-2016 – will substantially increase its operating scale and land bank. However, the transaction will also raise its financial risk and keep its debt leverage elevated, as it plans to partly fund the transaction with debt," said Franco Leung, a Moody's vice president and senior credit officer.

Sunac's negative outlook reflects its high-growth business strategy that exposes it to financial risk. The company's ratings could come under pressure if it liquidity deteriorates materially or if its debt leverage remains high, Moody's said.

If the acquisition is successfully completed, Sunac's debt leverage as measured by revenue to adjusted debt and including adjustments for its joint ventures and associates is expected to deteriorate to 30 percent to 38 percent over the next 1-2 years, from 40 percent to 45 percent as forecast by Moody's previously.

Its debt leverage was around 31 percent in 2016 and 64 percent in 2015 – levels that

are weak for its B2 corporate family rating.

Moody's expects that Sunac will assume a sizable amount of debt as part of the acquisition, including a 29.6 billion yuan 3-year loan from Wanda and consolidation of debt at the project company level.

"The proposed transaction does not immediately affect Sunac's rating, as the company should have sufficient liquidity to support the acquisition and its high-growth business strategy," added Leung.

Sunac will need to pay around 33.6 billion yuan in cash to Wanda within 90 days once the agreement is signed, or 48 percent of Sunac's cash balance of about 69.8 billion at end-2016.

But Moody's expects Sunac has sufficient liquidity to support the acquisition.

On July, 11 Sunac announced that it had entered into a framework agreement with Wanda for the acquisition of a 91 percent equity interest in 13 cultural and tourism project companies, and a 100 percent interest in 76 hotels from Wanda for a total consideration of 63.2 billion yuan.