The Wanda Group is to lend RMB 26.6 billion ($3.9bn) to Sunac China Holdings, the property developer buying its theme parks and part of its hotels portfolio.
That figure accounts for a large percentage of the RMB 29.57 billion Sunac is paying for Wanda’s “cultural tourism” business. This includes theme parks, waterparks and ski resorts at four existing Wanda Cultural Tourism City developments in China. Sunac will also take control of at least nine upcoming projects, which will be built under the Wanda name. It will pay a further RMB 35.6bn for the acquisition of 76 of Wanda’s 102 hotels.
The details of the loan agreement emerged in a regulatory filing made by Sunac before its Hong Kong-listed shares resumed trading on June 11. Typically, writes Variety, financing of this sort is used when the buyer does not have the financial resources to make the deal or when the seller has higher expectations of the businesses being sold than the buyer’s bankers. It may also mean that Sunac is making use of Wanda’s higher credit rating to reduce the deal’s ultimate cost to itself.
The stated objective of the sale to Sunac is reduce Wanda’s borrowings, which have recently come under scrutiny from regulators. But with the loan to Sunac, Wanda may not be cutting its debt by as much as first appeared. That would be particularly true if the scheme turns out to be an “entrusted loan”. This is where the bank collects fees but the loan remains on the books of the lending company, in this case Wanda. Such deals do little to reduce overall levels of indebtedness but instead move the debt around. This could trigger a domino effect in the case of a major default or corporate collapse.