The details emerged in a regulatory filing made by Sunac before its Hong Kong-listed shares resumed trading. The shares rose by 13% on Tuesday and were barely changed Wednesday, when they closed at HK$16.80 ($2.15).
Sunac will pay $5 billion from its own pocket for the $9.3-billion parks and hotel deal, which emerged Monday. The balance is to come from a three-year loan enabled by Wanda.
“[Wanda] shall procure for a loan in the total amount of RMB 29,600,000,000 to be advanced to [Sunac] through [a] designated bank with a term of three years at the bank’s three-year benchmark interest rate,” the filing said, without disclosing the bank’s identity or any kind of surety for the loan.
Typically, vendor 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.
In this case, it may also mean that Sunac is making use of Wanda’s higher credit rating to reduce the deal’s ultimate cost to Sunac by as much as $100 million.
The stated objective of the parks and hotels sale is to reduce Wanda’s borrowings, which have recently come under scrutiny from government regulators. But with the loan to Sunac, Wanda may not be cutting its debt by as much as appeared to be the case when the deal was announced. That is particularly true if the scheme turns out to be a so-called entrusted loan, where the bank collects fees but the loan remains on the books of the lending company, meaning Wanda.
Chinese regulators have recently been trying to reduce size of the country’s shadow banking sector, particularly the volume of entrusted loans in the financial system. Such deals do little to reduce overall levels of indebtedness but instead move the debt around. They also increase the complexity of lending and the interconnectedness of companies, which could trigger a domino effect in the case of a major default or corporate collapse.