Fitch Ratings has upgraded the Long-Term Foreign-Currency Issuer Default Rating (IDR) on Dalian Wanda Commercial Management Group Co., Ltd. (Wanda Commercial) to 'CC', from 'C', and that of Wanda Commercial Properties (Hong Kong) Co. Limited (Wanda HK) to 'CC', from 'C'.

Fitch has also upgraded the rating on the US dollar notes guaranteed by Wanda HK and issued by Wanda Commercial's subsidiaries to 'CC', from 'C'. The Recovery Rating is 'RR4'.

The upgrades follow Wanda Commercial's repayment of a coupon on its USD400 million bond due 2025 before the grace period ended. Fitch believes the company will continue to face liquidity challenges as there is no clarity on the refinancing plans of several onshore and offshore bonds maturing in the next six months.

Key Rating Drivers

Bond Coupon Paid: Wanda Commercial missed the coupon payment due on 20 July 2023 on its USD400 million bond due 2025. The company repaid the coupon on 31 July before the grace period ended. The company also confirmed that it has paid the coupon due on 31 July on its USD600 million bond maturing in 2024. Wanda Commercial also said it had sufficient funds to service any coupon payments due in the short term.

Potential Restrictions on Cash: Wanda Commercial previously reported CNY28 billion in readily available cash at end-March 2023, of which CNY10 billion sits at Zhuhai Wanda Commercial Management Ltd., an asset-light property management company in which Wanda Commercial holds a 79% stake, and may not be available to repay Wanda Commercial's debt.

Wanda Commercial also holds CNY21 billion of investments in wealth-management products and CNY33 billion of tradable financial assets. However, Fitch believes there may be limits on Wanda Commercial's access to its available cash balance, in light of the recent use of the bond interest grace period.

Bond Repayment Uncertainty: Wanda Commercial has a CNY3.8 billion bond puttable on 9 September 2023 and USD600 million bond maturing on 29 January 2024. The US dollar bond has no grace period for principal payment, and any missed payment would constitute an event of default. Fitch believes there is significant uncertainty in the company's near-term refinancing and/or repayment plan.

Parental Linkage Considerations: Fitch no longer applies our Parent and Subsidiary Linkage (PSL) Rating Criteria to assess the linkage between Dalian Wanda Group Co., Limited, Wanda Commercial's 44% parent, and Wanda Commercial. The latter's rating is driven by the payment or nonpayment of upcoming debt obligations.

Fitch rates Wanda HK and Wanda Commercial based on the PSL criteria. The companies' IDRs are the same, as we assess their Standalone Credit Profiles as being equal in a distressed scenario. Wanda HK is Wanda Commercial's fully owned sole offshore financing platform and overseas investment-holding company.

Derivation Summary

Wanda Commercial's and Wanda HK's ratings are driven by the high level of credit risks related to the repayment of its upcoming capital-market maturities.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Available cash balance, including 40% of wealth-management products, maintained at CNY20 billion-30 billion in 2023-2024.

No equity financing cash inflow due to timing uncertainty.

Recovery Rating on Wanda HK

The calculation is based on 2021 annual results, as no 1H22 or 2022 results are available. The recovery analysis assumes that Wanda HK would be liquidated in a bankruptcy. Fitch assumes a 10% administrative claim.

Liquidation Approach

The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in the sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.

Advance rate of 0% is applied to excess cash after netting off payables and other payables.

Advance rate of 50% is applied to investment properties, supported by Wanda HK's hotels and shopping malls, which generate rental yields of above 6%.

Advance rate of 70% is applied to accounts receivable. This is more conservative than the 80% in Fitch's criteria, as the ending balance is outdated.

The allocation of value in the liability waterfall results in a Recovery Rating corresponding to 'RR3' for offshore senior debt. However, the Recovery Rating is capped at 'RR4', because under Fitch's Country-Specific Treatment of Recovery Ratings Criteria, China falls into Group D of creditor friendliness, and instrument ratings of issuers with assets in this group are subject to a cap of 'RR4'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Greater clarity on the repayment plans for capital-market maturities for the rest of 2023 and 1H24

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to repay capital-market maturities or bond interest falling due in 2023

Any announcement of a default or default-like process

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Issuer Profile

Wanda Commercial is China's largest shopping mall owner and one of the largest commercial property owners rated by Fitch.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Wanda Commercial has an ESG Relevance Score of '4' for Financial Transparency, because Wanda Group is a private company and its financial disclosure to Fitch is limited. We have obtained audited financial reports and access to Wanda Group's management, but information about the group's other principal subsidiaries may be limited. The uncertainty over Wanda Group's financial transparency has a negative impact on the credit profile, and is highly relevant to the rating.

Wanda Commercial has an ESG Relevance Score of '4' for Group Structure, because there is a lack of transparency, particularly in intra-group transactions between Wanda Commercial and Wanda Group. This includes regarding the issuance of guarantees or other forms of credit enhancement, or contractual features of debt, such as subordination or ringfencing, that affect the risk profile of Wanda Commercial, which indicates weak group structure. This has a negative impact on the credit profile, and is highly relevant to the rating.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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