China’s Self-Appointed Warren Buffett Haunted by Fosun’s $40 Billion Debt

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

A decade ago, Guo’s Fosun along with conglomerates HNA, Dalian Wanda, CEFC and Anbang fueled an explosion in Chinese overseas investment, but most unraveled after President Xi Jinping called off the spurt of acquisitions. for the debt.

Guo survived the crackdown. But he is now back in the spotlight after a flash sale of real estate bonds put a $40 billion debt and liquidity crisis at his sprawling conglomerate under scrutiny.

Moody’s, the rating agency, has launched a review of the Shanghai-based group for “contagion” risk that extends to a portfolio that includes dozens of companies in China, Europe and the US, as well as hundreds of smaller subsidiaries. .

Fosun’s bond slide caused two of the company’s Hong Kong-traded dollar bonds to fall more than 35 percent in mid-June before paring last week’s losses.

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

“Private entrepreneurs in China continue to face this political risk that is very opaque and difficult to predict, because no one knows if they are going to run afoul of the authorities,” Shih said. “It is extremely difficult to know if a private entrepreneur will get into trouble.”

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

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

Fosun’s total consolidated debt is 260 billion yuan ($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 puts Fosun’s holding company debt at 112 billion yuan, including onshore loans but excluding the debt of various consolidated investees.

Refinancing through the offshore dollar bond market, in the past a key channel for Chinese developers to take advantage of investors, is difficult for Fosun because funds have eroded in Chinese companies after a series of defaults, including the real estate developer Evergrande, which has $300 billion or more. in passive.

Xiaoxi Zhang, a financial sector analyst at research group Gavekal, said not only have Chinese property developers been “locked out” of the overseas bond market for months, but in China investors are “more than ever” giving the back to companies like Fosun. without state support.

“Those who are in a tight liquidity situation may soon run out of cash as refinancing is difficult and therefore may default on the bonds,” he said.

Investment portfolio breakdown column chart (%) showing Fosun's asset concentration

Fosun told the Financial Times it was in a “strong and healthy position”, targeting a debt-to-equity ratio of 54 per cent and total cash, bank balances and time deposits of Rmb96.78bn 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 multiple Chinese banks,” he added.

The group also announced plans to repurchase the outstanding principal of two offshore bonds due this year, totaling approximately $800 million.

According to Citi analysts, Guo and his top lieutenants have signaled plans to use existing cash and credit lines, as well as asset sales, to meet their obligations.

Illustrating Guo’s intensifying efforts to shore up liquidity, the company’s divestments this year already exceed $2 billion, compared with $85 million last year and $420 million in 2020, according to data from Dealogic.

Fosun reached an agreement in March to sell its fashion division, Lanvin Group, through a special purpose acquisition company. Weeks later, the company agreed to sell its US insurance group AmeriTrust to US provider AF Group. In late May, Fosun sold its last tranche of shares in Tsingtao Brewery for $523 million.

The group is also shedding 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, would likely weaken because continued divestments would mean less dividend income and reduce the size of its portfolio. However, others, including Morgan Stanley and Japan’s Daiwa Securities, argue that the market has overreacted to Moody’s decision to review the company.

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

After a poor rural upbringing, he gained admission to Shanghai’s elite Fudan University and then went on to build one of China’s largest private companies. His wealth is estimated at more than $4.2 billion as of Friday, according to Forbes.

Overseas, the acquisitive conglomerate has counted Hollywood film production company Studio 8, New York’s One Chase Manhattan Plaza, Canadian circus operator Cirque du Soleil and British tour company Thomas Cook among its investments, though last two failed.

At home, where Guo remains a household name, Fosun has amassed a sizable property portfolio, a stake in Minsheng Bank, one of the country’s largest private lenders, as well as a large pharmaceutical division that partnered with BioNTech in a bid, until now. not done: bring covid-19 vaccines to China.

Chart showing Fosun divestments accelerating in 2022

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

However, lingering questions stemming from a lack of transparency and complicated structure hang over the group, according to analysts. These are problems that have been the hallmark of collapsing Chinese conglomerates.

Fosun has been among the so-called “grey rhinoceros” groups for many years because of the unseen but potentially huge risk they posed to China’s financial stability.

After the Xi administration in late 2016 wrote off highly leveraged outgoing investments from Rhinos, many tycoons went out of business.

In late 2016, Shanghai authorities suddenly detained Guo himself for several days. After his arrest, his company privately downplayed the incident as a routine procedure in an investigation into then-city vice mayor Ai Baojun, who was later jailed for bribery.

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

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

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

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

“I think it still has some degree of protection. But the 20th Communist Party Congress may mean the end of the power of the Shanghai faction,” Shih said. “On the other hand, he could have been cultivating new patrons.”

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