Fosun’s debt-fuelled shopping spree worries analysts
Debt-fuelled HK$20 billion spending spree triggers warnings, but no new downgrade
A HK$20 billion overseas spending spree by China's biggest privately owned conglomerate, Fosun International, is raising red flags among analysts.
Rating agency Moody's has expressed concern that the huge debt that has been financing its overseas deals is hurting the Hong Kong-listed firm's financial strength.
"We are cautious about Fosun's future prospects following large acquisitions like its €1 billion (HK$10.4 billion) deal to buy three Portuguese state insurers in May," said Hu Kai, a senior credit officer at Moody's.
In May, Fosun completed its €1 billion acquisition of 80 per cent of three Portuguese state-owned insurers, Fidelidade-Companhia de Seguros, Multicare-Seguros de Saude and Cares-Companhia de Seguros, beating an offer from Apollo Global Investment of the US.
The Shanghai-based investment firm has since made five more investments, mostly overseas. Its latest deal came on Monday, when it beat a competing merger proposition from Australian-listed oil firm Horizon Oil to fully acquire another Australian-listed oil company, Roc Oil, for A$489 million (HK$3.53 billion).
In March, Fosun was part of a consortium that acquired German private bank BHF Bank for €354 million, of which €98.5 million came from Fosun. Moody's said yesterday that Fosun's acquisition of Roc Oil had no immediate impact on its Ba3 credit rating, three notches below investment grade. But Moody's did not change the negative outlook for Fosun.
A negative ratings outlook is typically followed by a downgrade within six months if financials do not show marked improvement. Moody's warned explicitly in May of the risk of a downgrade if Fosun maintained its aggressive, debt-funded growth.
"Fosun's financial profile has remained weak because of its large debt-funded investments. Its investments have exceeded its internally generated cash. For instance, its recurring ebitda is barely enough to cover its interest expenses and tax payments," the May report said.
"In future, if Fosun makes major investments using its own financial resources, the impact on its financials will be negative," Hu warned.
Fosun said its acquisition of Roc Oil will be financed by its own cash reserves plus external loans.
The acquisition carries execution risk because Roc is involved in oil exploration, a risky business, and Fosun lacks experience in oil and gas exploration and production, Hu said.
Fosun is one of China's most diversified privately owned companies, with businesses in steel, mining, property and pharmaceuticals.
"We expect Fosun will leverage its Portuguese insurance subsidiaries for investments in future. If it does so, Fosun's financial profile will become more stable," Hu predicted.
He pointed out that Fosun's investment in German fashion retailer Tom Tailor on July 30, and in Bona, a Nasdaq-listed film distributor based in China, on July 24, were done by Fosun's Portuguese insurance subsidiary Fidelidade.
Standard & Poor's predicts a stable outlook for Fosun, saying it will benefit from cash flow from its Portuguese acquisitions. In April, Standard & Poor's lowered its credit rating for Fosun from BB-plus to BB, two notches below investment grade.
"We downgraded Fosun because the company's leverage is unlikely to improve in the next 12 months. Fosun's mostly debt-funded acquisitions and the continued weak financial performance of its steel segment are largely responsible for the increase in leverage over the past year. We expect the company to continue to make significant acquisitions in the next 12 months," said Standard & Poor's credit analyst Huma Shi.
Guo Guangchang, the chairman and majority owner of Fosun, is a member of the 12th National Committee of the Chinese People's Political Consultative Conference.