From Buying Hollywood to a Junk Rating: Wanda Swelled With Policy, and Shrank With It

"We could have arranged the financing ourselves overseas. We just didn't want to become a company that breaks the rules."

On Thursday, the Hurun Research Institute published its 2017 Rich List. Evergrande Real Estate chairman Xu Jiayin, worth 290 billion yuan, passed Jack Ma and Pony Ma to become China's new richest man.

Wang Jianlin, chairman of Dalian Wanda Group and China's richest man for the past two years, dropped out of the top three. He now ranks fifth.

That is one small picture of Wanda's recent troubles. In the space of nine days, Wang also collected two "junk" ratings and one negative outlook from the world's three big credit rating agencies.

"Junk" refers to the credit rating the agencies gave Wanda. On September 28 and 29, Standard & Poor's and Moody's each cut Wanda Commercial Properties into junk territory.

The third big agency, Fitch, has not changed Wanda's rating yet, but on October 7 it put Wanda on a "negative watch list."

All three agencies judged Wanda's debt position negatively, and all pointed at the same problem: Wanda is running short of money overseas, and government controls will not let it move money out of China.

Why does the richest man in the country have a money problem?

Following Policy, Wanda Once Poured Money Into Companies Abroad

In 2012, 13 government bodies — among them the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and the China Banking Regulatory Commission (CBRC) — jointly issued an official directive, "Encouraging and Guiding Private Enterprises to Actively Pursue Outbound Investment," urging Chinese companies to put their money abroad.

Wanda began buying abroad on a large scale at about the same time. That May it announced it would spend $2.6 billion on AMC, the second-largest cinema chain in the United States. In 2013 Wang invested in a yacht company and a hotel, $1.325 billion between them.

"Wanda's growth fits the country's long-term strategic direction. We are going with the current." Wang said this the following year, speaking at Tsinghua University's School of Economics and Management.

Wanda's overseas investment peaked in 2014 and 2015, with money going into Britain, Spain, the United States and Australia, through both investments and acquisitions.

By incomplete count, Wanda's overseas deals between 2012 and early this year came to at least $20 billion.

Wanda Commercial Properties listed in Hong Kong in 2014, and the next year Wang's personal fortune passed Jack Ma's, taking him from fourth to first on the Forbes China Rich List.

Wanda was not the only one riding the current. JLL counted a record $16.5 billion of Chinese real estate investment in overseas markets in 2014, up 46% from 2013.

Dealogic data show Chinese companies completed $187 billion of overseas investments and acquisitions in 2016, four times the 2012 figure. Wanda, Anbang, HNA Group and Fosun — all private Chinese companies — were among the biggest buyers.

Wanda's name, and Wang's, traveled with the deals. In 2015 The Economist ran a piece called It's a Wanda-ful life, introducing its readers to Wang's sprawling business and calling him a man with Napoleonic ambition.

Before Wanda bought AMC in 2012, The New York Times had mentioned the company only in a few scattered China stories. By 2016, after its big-spending purchases in Hollywood, Wanda was turning up in the Times more than ten times a month.

According to The New York Times's report on Wanda's Hollywood press event, the whole Hollywood press corps turned out, and the mayor of Los Angeles came to lend his support. Wang spoke in Mandarin: "when he said American studios needed to improve the quality of their movies, the audience broke into applause," and "a woman in a gold gown said at the end of the event, 'This is so exciting!'"

The buying spree drew the attention of the US Congress at one point. Sixteen members signed an open letter calling for such deals to be regulated.

Excited or worried, everyone believed Wanda could raise enough money to buy up Hollywood.

Most of the Money Wanda Spent Abroad Was Borrowed

Investing in foreign companies on that scale meant borrowing on that scale.

Debt is the usual way companies pay for huge acquisitions. Amazon funded its $13.7 billion purchase of Whole Foods by issuing $16 billion of bonds. This May, China Life bought 48 commercial properties in the United States for $950 million, and 60% of the money came from a syndicated loan led by JPMorgan Chase.

Wanda was no exception. Reuters counted a $3.1 billion loan raised in 2012 to buy AMC, the second-largest US cinema chain. Several Chinese banks committed financing at the time, among them Bank of Beijing, BOC International, the Export-Import Bank of China and ICBC. In effect, Wanda borrowed every dollar it used to buy AMC.

Similar deals followed: a $280 million refinancing loan for the 2014 purchase of the triathlon company World Triathlon Corporation; a $500 million loan for overseas property projects; an $800 million club loan for two resort projects in China; and a $600 million secured loan for a skyscraper in Chicago. All of it was packed into the third quarter of 2016.

At the same time Wanda took on a still bigger loan, mostly to help it leave the Hong Kong market and return to the A-share market at home.

In September 2016 it raised up to HK$30.78 billion (about $3.97 billion) from Chinese banks to finance the HK$34.45 billion buyout that took Wanda Commercial Properties private. Qihoo 360 used the same method in its 2016 privatization, with China Merchants Bank and two other banks providing $3.4 billion of debt financing.

That run of frequent, very large borrowings pushed Fitch to cut Wanda Commercial Properties' ratings outlook to negative last September, on the expectation that repayment would strain the company over the following two years. Moody's did the same.

By incomplete count from public records, Wanda borrowed more than $10 billion between 2012 and 2016.

Some banks were frightened by Dalian Wanda's "debt binge," but plenty were still willing to lend on stiffer terms. "If the loan deal came with a collateral plan, we might reconsider joining," a Hong Kong bank lending officer told Reuters.

Wanda was willing to give ground to the banks. Its 2016 interim report put its highest borrowing rate at 12%.

Borrowing to buy companies was only the first step in piling up debt.

Some of the companies Wanda bought carried huge debts of their own. AMC's debt ratio before the deal was as high as 90%, about $2.6 billion.

That debt ended up on the books of the parent, Wanda. And when a company did badly and its losses grew, Wanda had to put in more money. It paid $2.6 billion for AMC and added $500 million of working capital, $3.1 billion in all.

The businesses Wanda bought could not, in the short run, earn back the debt it took on to buy them.

Policy Changed, and Wanda Could No Longer Pay

The policy of encouraging companies to go abroad soon turned 180 degrees.

Last November the State Administration of Foreign Exchange required that any overseas payment above $5 million under a company's capital account — including direct investment such as portfolio investment or overseas acquisitions — be reported to the local foreign exchange bureau for approval. The rule also covered the still-unremitted foreign exchange of large projects already approved. The old threshold had been $50 million.

In December another document appeared, requiring banks, from July 1, 2017, to report any cross-border transaction above 200,000 yuan to the central bank.

Official controls on corporate capital outflows

2016-11-27

The State Administration of Foreign Exchange required prior approval for transactions by domestic companies worth $5 million or more.

2016-11-28

The State Administration of Foreign Exchange said six kinds of outbound investment by domestic companies could be banned.

2016-11-29

The central bank barred domestic companies from using domestic funds to finance companies abroad.

2016-12-02

The Ministry of Commerce ordered stricter review of the paperwork required for new outbound investment filings.

2016-12-05

The National Development and Reform Commission introduced a new format for outbound investment reports to tighten authenticity checks.

2017-06-07

The China Banking Regulatory Commission told the large state-owned commercial banks to examine the overseas credit lines and risk exposure of several companies, including Wanda, Anbang and HNA Group.

2017-07-18

The National Development and Reform Commission said it would keep watching for irrational outbound investment in property, hotels, sports clubs and similar fields, to guard against the risks of investing abroad, and "advises the companies concerned to decide prudently."

The value of Chinese companies' overseas deals shrank sharply, from $187 billion in 2016 to $25 billion this year.

Regulation blocked Wanda's plans to expand abroad. In April this year its $1 billion purchase of the production company Dick Clark Productions collapsed, and in an interview with the Financial Times Wang blamed policy outright: "The policies on both sides changed, so we gave up the acquisition. Relevant policies in both countries changed. Some people in the United States also objected to our acquisition, and some relevant policies on the Chinese side changed too."

Regulators named Wanda directly. First, in June this year, the CBRC ordered a review of credit risk covering the star dealmakers abroad — Wanda, Anbang, HNA Group and Fosun — which at one point accounted for a fifth of the value of China's outbound deals.

The Beijing News confirmed with sources in July this year that the State Council had told the CBRC to police six of Wanda's overseas investment projects, each worth billions of dollars; the relevant instructions circulated online.

The Wall Street Journal, which read the document, said the measures included these: the companies Wanda had bought abroad could not raise money from Chinese financial institutions; Wanda could not pledge those companies as collateral to borrow from financial institutions; and the acquired companies could not be injected into Wanda's domestically listed company.

On top of that, if an acquired company abroad ran into trouble, Wanda could not send it money from China. And if Wanda wanted to sell those companies to Chinese buyers, regulators such as the Ministry of Commerce would neither record nor approve the deal.

In other words, Wanda could no longer borrow from domestic banks to buy more companies abroad, and it could not repay the debts it had already run up with domestic assets or domestic financing.

When the news got out, Wanda's shares and bonds fell together.

Wang's explanation shifted a little. In May this year, speaking at China University of Political Science and Law, he said: "The country's foreign exchange controls are temporary. While they last, Wanda will slow its overseas acquisitions selectively and pick good companies with care."

By July, in another interview, Wang said he would "actively answer the country's call and put our main investment at home."

The regulators hurt Wanda directly, and that is exactly why all three agencies cut its rating: a credit rating is the agency's expectation of whether a company can repay. Wanda borrowed more than $10 billion to buy assets abroad, and now that it cannot move money out of China, it naturally looks like a high risk of default.

Property companies like Wanda have always been the model of running a business on debt, and their mark is a high net gearing ratio. QDaily once counted the debts of more than 130 listed Chinese property companies in the first half of this year: more than a third had net gearing above 100%. That means the cash they held, some of it borrowed from banks, was not enough to cover their debts, and the companies were operating in a dangerous state.

Property companies still do business by borrowing heavily all the same — borrow to build, mortgage the finished building to borrow again and build again — steadily inflating the numbers on the balance sheet. After several rounds of tightening and stimulus in the property market, investors and developers have settled on one expectation: the government will not let house prices actually fall.

This is also the way Wanda has done business for years without changing. Wang built a commercial empire on financing and stretched it into film, sports and culture.

Last September Wang took the company off the Hong Kong market, planning to list it on the A-share market instead, and stopped disclosing its finances afterwards. In Wanda Commercial Properties' first-half 2016 accounts, net gearing was 65%, on the high side of the middle.

The rapid sales that followed were all attempts to ease the debt.

In July this year Wanda sold 91% of 13 culture-and-tourism city projects, along with 76 hotels, to Sunac for 63.1 billion yuan. The announcement said every yuan raised by the transfer would go to repaying loans: "Wanda Commercial plans to clear the great majority of its bank loans within the year."

Wang explained the deal as "selling what should be sold and keeping what should be kept." "The culture-and-tourism projects we transferred take the longest to pay back of anything in property, and put the most pressure on cash flow," he said. Two years after the deal, he predicted, Wanda Commercial's rental and other income would exceed its property income, and the company would give priority to film, sports and similar fields.

Wanda was in fact in a great hurry to close the deal — so much so that it was willing to "lend" Sunac the money to buy Wanda's own assets. One of Sunac's payments was to be funded by an entrusted loan from Wanda. According to the disclosure, "five working days after Wanda receives the third payment, it will issue a 29.6 billion yuan loan to Sunac through a designated bank."

In the end this odd arrangement, a homeowner lending the buyer the money to buy the house, never happened. R&F Properties and Sunac together bought 63.7 billion yuan of Wanda's properties. But Wanda's plan to sell 76 hotels for 33.5 billion yuan became 77 hotels for 19.9 billion yuan.

After the three-way deal with Sunac and R&F, Wanda repaid part of its bank loans and cut its debt. Wang said later that after the deal Wanda Commercial owed about 200 billion yuan and had about 170 billion yuan of cash on its books.

Pan Shiyi's verdict on Wanda's rush to unload assets was that the prices were too low: "I thought I had read it wrong."

Abroad, too, Wanda had to sell. In August this year it sought a buyer for an A$2 billion property project in Australia. But the assets it bought dear while riding the current now have no Chinese company waiting to take them, and what price they will fetch is anyone's guess.

Wanda's debt problems reached even AMC, the American company it bought five years ago. AMC's share price fell this July, and analysts and investors asked enough questions that the company finally put out a statement saying Wanda was not the source of the money used to buy it, and that none of the money came from mainland Chinese banks.

The irony is that when AMC was bought, the banks making the loans felt confident about Wanda's finances: "If there was anything to worry about, it was that the banks had doubts about AMC."

Swollen by Policy, Shrunk by Policy

The Bloomberg Billionaires Index puts Wang's fortune at $28.2 billion today, $16.9 billion below its peak.

Wanda's commercial map is shrinking too. Besides selling assets to Sunac, since February this year Wanda has pulled at least 40 billion yuan of registered capital out of the project companies behind its Wanda Plazas. Add August's injection of Wanda Hotel Management and Wanda Culture Tourism Group into a Hong Kong-listed company, worth 7.05 billion yuan together, and Wanda has moved more than 100 billion yuan of assets around this year.

Even Wang's internet-famous son, Wang Sicong, suddenly fell silent — more than 100 days between June and August this year without a new Weibo post.

Wang once summed up his business strategy as "keep close to the government, keep away from politics." Two years ago, in an interview with CCTV, he said "China's economy is a government-led economy, and property in particular is an approval-driven industry": "So I can't say I'll ignore the government in this industry, that's simply impossible... Doing business in this country, I don't think you can get away from the government."

And Wanda's rise and fall has plainly followed policy closely.

In April this year, asked about the Chinese government's capital controls, Wang said: "We could have arranged the financing ourselves overseas. We just didn't want to become a company that breaks the rules."

Chart: Feng Xiuxia

Cover image: Fortune