China’s so-called Warren Buffett haunted by Fosun’s $40 billion debt

Chinese billionaire Guo Guangchang, whose global empire includes French resort group Club Med, Portugal’s biggest bank and English football club Wolverhampton Wanderers, was among the last men standing.

A decade ago, Guo’s Fosun along with conglomerates HNA, Dalian Wanda, CEFC and Anbang sparked a boom in offshore Chinese investment, but most of it was canceled after President Xi Jinping halted the wave of acquisitions fueled by debt.

Guo survived the repression. But he is now back in the spotlight after a sudden sale of real estate bonds highlighted a cash crunch and $40 billion in debt at his vast conglomerate.

Moody’s, the ratings agency, launched a review of the Shanghai-based group on the risk of “contagion” spreading to a portfolio that includes dozens of companies in China, Europe and the United States, as well as hundreds of small subsidiaries.

The Fosun bond rout sent the company’s Hong Kong-traded dollar bonds down more than 35% in mid-June before paring last week’s losses.

Tensions over Guo’s empire stemmed not only from rising interest rates and deteriorating consumer confidence, but also from “unknowable political risks”, said Victor Shih, a professor of Chinese political economy at the University of California.

“Private entrepreneurs in China continue to face this very opaque and difficult to predict political risk, because no one knows if they will clash with the authorities,” Shih said. “It’s just extremely difficult to know whether a private contractor will get in trouble.”

The immense challenge that Guo faces marks the final turning point in an operatic life. But growing questions about Fosun’s debt obligations highlight how turmoil in China’s real estate sector is spreading across the country’s business landscape and hitting investors and assets overseas.

“Fosun has a weak financial profile. The company’s recurring income, mainly dividends from the underlying investments, is insufficient to cover interest and operating expenses at [holding company] level,” Moody’s analysts said.

Fosun’s total consolidated debt stands at Rmb 260 billion ($38 billion), Moody’s said, adding that about 45% of its debt at the holding company level is due before the end of March 2023. S&P values ​​Fosun’s holding company debt at Rmb 112 billion, including both offshore and onshore borrowings but excluding the debts of the various consolidated holdings.

Refinancing via the offshore dollar bond market – in the past a key channel for Chinese developers to attract investors – is difficult for Fosun as funds have deteriorated on Chinese companies after a series of defaults, including by the Real estate developer Evergrande, which has $300 billion or more. in the passive.

Xiaoxi Zhang, a financial sector analyst at Gavekal Research Group, said not only have Chinese property developers been “barred” from the offshore bond market for months, but in China investors are turning the back to companies such as Fosun. without state support.

“Those with tight cash positions may soon run out of cash as refinancing is difficult, and so may default on bonds,” she said.

Column chart of investment portfolio breakdown (%) showing the concentration of Fosun's assets

Fosun told the Financial Times it was in a “sound and healthy position”, pointing to a debt ratio of 54% and total cash, bank balances and time deposits of Rmb 96.78 billion at the end of 2021.

“[Fosun] and its subsidiaries have established partnerships with more than 100 Chinese and foreign banks around the world and have signed strategic cooperation agreements with many international banks and several Chinese banks,” he added.

The group also announced plans to buy back the outstanding principal of two offshore bonds maturing this year, for a total of around $800 million.

According to Citi analysts, Guo and his top aides announced their intention to use existing cash and credit facilities, as well as asset sales, to meet their obligations.

Illustrating Guo’s intensified efforts to bolster its liquidity, the company’s divestments this year already top $2 billion, up from $85 million last year and $420 million in 2020, according to Dealogic data.

Fosun reached an agreement in March to sell its fashion division, the Lanvin Group, through a special purpose acquisition company. A few weeks later, the company agreed to sell its US insurance group AmeriTrust to US provider AF Group. At the end of May, Fosun sold its last share of shares in Tsingtao Brewery for 523 million dollars.

The group is also offloading shares in infrastructure investments, selling stakes in Zhongshan Public Utilities and Shandong Taihe Water Treatment Technologies.

Moody’s noted that the company’s credit quality, which directly affects its ability to refinance itself, would likely be weakened as continued divestments would mean less dividend income and reduce the size of its portfolio. However, others, including Morgan Stanley as well as Daiwa Securities in Japan, say the market overreacted to Moody’s decision to review the company.

Guo, who began life in the eastern province of Zhejiang during the miserable chaos of Mao Zedong’s Cultural Revolution, displayed a strong instinct for survival.

After a mediocre rural education, he was admitted to Shanghai’s elite Fudan University and then set out to build one of China’s largest private companies. His fortune is estimated at more than $4.2 billion as of Friday, according to Forbes.

Abroad, the acquiring conglomerate has included among its investments the Hollywood film production company Studio 8, One Chase Manhattan Plaza in New York, the Canadian circus operator Cirque du Soleil and the British travel agency Thomas Cook, although the latter two failed.

At home, where Guo remains a household name, Fosun has amassed a large real estate portfolio, a stake in Minsheng Bank, one of the country’s largest private lenders, as well as a large pharmaceuticals division that has partnered with BioNTech in a bid – so far unrealized – to bring Covid-19 vaccines to China.

Graph showing Fosun's divestments accelerating in 2022

The group’s main remaining assets are stakes in more than 40 companies in healthcare, tourism, asset management, mining, steel and technology manufacturing. In 2021, the group’s total revenue stood at Rmb 161 billion and its assets stood at Rmb 806 billion, according to the company.

Still, lingering questions stemming from a lack of transparency and a complicated structure hang over the group, analysts say. These are issues that have characterized the collapse of Chinese conglomerates.

Fosun has for many years been part of the groups dubbed the “gray rhinos” because of the invisible but potentially immense risk they pose to China’s financial stability.

After Xi’s administration in late 2016 ended high-leverage outbound rhino investments, many tycoons went bankrupt.

At the end of 2016, Guo himself was suddenly detained by Shanghai authorities for several days. After his detention, his company privately downplayed the incident as routine proceedings in an investigation into then-city vice mayor Ai Baojun, who was later jailed for corruption.

But a person familiar with Guo’s situation told the FT that the investigation was more serious and when he reappeared days later, the generally impartial billionaire told a group of fellow tycoons that the release was “the most special day” of his life.

Many of his peers were less fortunate. Xiao Jianhua, the enigmatic financier linked to Beijing’s top leaders, was abducted from the Four Seasons hotel in Hong Kong in January 2017 and is believed to be held in Shanghai.

Wu Xiaohui, the head of Anbang, was imprisoned for embezzlement. Two top executives of travel and finance conglomerate HNA were arrested last year. Co-founder Wang Jian died in France in 2018. Ye Jianming, the head of state-backed conglomerate CEFC has not been seen since his arrest in early 2018.

Shih, of the University of California, said Guo’s future hinged in part on whether his key political connections – most of whom are believed to be Shanghai party and business elites – are still in senior positions. ‘influence.

“I think he still has some degree of protection. But the 20th Communist Party Congress could spell the end of the power of the Shanghai faction,” Shih said. “On the other hand, he could have cultivated new funders.

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