Too Much Debt: Outlook for China’s Fosun Turned to Negative
“Fosun’s leverage has increased materially in the past year following the completion of acquisitions,” stated the rating agency in its report.
Fosun (0656.HK) is a China-based conglomerate with businesses in both industrials and financials. The group wants to become an insurance-led investment holding company like Warren Buffet’s Berkshire Hathaway. Hence, it started to expand its insurance business by acquiring Bermuda-based insurer Ironshore Inc. and U.S.-based Meadowbrook Insurance Group in 2015.
“We expect Fosun’s insurance businesses will partly offset weakening performance from its industrial operations and that the company will maintain a diversified portfolio of businesses and assets with satisfactory quality,” said S&P.
Industrial operations accounted for 81 percent of the company’s revenue in 2015. However, with the recent acquisitions, insurance segment’s contribution to the revenue will increase to 30 percent in 2016, according to S&P estimates.
The company’s debt-to-EBITDA (earnings before interest, tax, and depreciation) ratio, which shows the leverage position for its industrial operations increased to 16.8x in 2015 from 9.1x a year earlier. This compares to an average debt-to-EBITDA ratio of 2.1x for S&P 500 companies.
The debt-to-EBITDA is a common metric used by credit rating agencies to assess the probability of a company’s defaulting on its debt. The higher the ratio, the more difficult it becomes for a company to pay off its debt.
“The negative outlook reflects our expectation that Fosun’s leverage will remain high over the next 12 months, despite a focus on consolidating existing investments,” said S&P.
The rating agency also affirmed its long-term corporate credit rating at “BB,” which is two notches below investment grade and lowered its long-term Greater China regional scale rating one notch to “cnBB+.”
Fosun Group, led by Chinese billionaire Guo Guangchang, appeared to owe much of its early success to the Chinese Communist Party regime. But in recent years—as the Party grapples with internal strife and economic uncertainty—the group has increasingly shed its reliance on Party.
Fosun has moved capital aggressively out of China in recent years, acquiring companies and real estate in Europe and North America. The company acquired Ironshore Insurance and Meadowbrook Insurance in more than $2.2 billion deals in 2015. It also bought companies like Club Med and Cirque du Soleil.
Its real estate arm acquired the 2.2 million-square-foot One Chase Manhattan Plaza in downtown Manhattan for $725 million in 2014. Fosun overall spent about $10 billion buying assets in developed markets since 2013, according to a report by Bloomberg.
Guo cites American investor Warren Buffett as an inspiration and views Buffett’s Berkshire Hathaway as his Holy Grail. As far back as 2011, Guo had his sights set on Berkshire Hathaway. He referred to himself as an “apprentice” of Buffett during an interview with CNBC. “We’re learning from his investment methods. We hope to build on our own strengths and become Buffett’s successful disciples in China,” Guo told CNBC.
He is one of the Chinese tycoons being investigated in the anti-corruption campaign of Chinese Communist Party leader Xi Jinping. He disappeared for few days in December 2015 and then reappeared after assisting authorities, according to media reports. He is suspected of having intricate ties with the family and key aides of former CCP leader Jiang Zemin.