Fosun International Ltd. Outlook Revised To Stable From
Positive On Higher Leverage; Ratings Affirmed
• 29-Apr-2020 07:52 EDT
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• A higher loan-to-value (LTV) ratio stemming from debt-funded acquisitions in 2019 and the current market volatility due to COVID-19 have reduced Fosun International Ltd.'s rating buffer.
• In our view, the Chinese conglomerate's good bank funding channels and proven access to both onshore and offshore capital markets could temper the risk from its high short-term debt.
• On April 29, 2020, S&P Global Ratings revised its rating outlook on Fosun to stable from positive. At the same time, we affirmed our 'BB' long-term issuer credit rating on Fosun and issue rating on the company's guaranteed senior unsecured debt.
• The stable outlook reflects our expectation that Fosun will maintain good access to funding channels and make limited debt-funded acquisitions over the next 12 months.
HONG KONG (S&P Global Ratings) April 29, 2020--S&P Global Ratings today took the rating actions listed above.
Fosun's debt-funded investments in unlisted assets in 2019 have reduced its rating buffer. A higher LTV ratio and lower listed asset weighting have reduced the company's buffer. Its investments outpaced disposals by Chinese renminbi (RMB) 4.9 billion in 2019, with the gap funded by debt. This partially resulted in Fosun's LTV ratio rising to about 37% as of end-2019, from 35.5% as of end-2018. Moreover, the company's new investments were mostly in the primary market, which weakens its asset liquidity. The listed asset weighting decreased to about 42% as of end-2019, from 46% as of end-2018.
A large and diversified portfolio enables Fosun to withstand volatilities. In our view, the company's highly diversified investment portfolio across several industries in different continents supports its flexibility in navigating market volatility and avoiding concentration risk in single markets. This provides a rating buffer. Fosun's portfolio value was about RMB238.7 billion as of end-2019 (after S&P Global Ratings' adjustment). We estimate the portfolio value was still above RMB230 billion as of April 24, 2020, because the appreciation in the value of Shanghai Fosun Pharmaceutical (Group) Co. Ltd. mostly offset the depreciation in the values of other listed assets, especially Fosun Tourism Group and Banco Comercial Português, S.A. As of April 24, Fosun's LTV was about 38%. Fosun's exposure to the consumer discretionary sector should be manageable. Shanghai Yuyuan Tourist Mart (Group) Co. Ltd. (8% of portfolio value), Fosun Tourism Group (2% of portfolio value), and Fosun Fashion Group (Cayman) Ltd. (1% of portfolio value) are Fosun's investees in the consumer discretionary sector (travel and high-end retail). These companies are particularly exposed to pressure from the COVID-19 fallout. However, these assets collectively account for 10%-15% of Fosun's portfolio value (as of April 24, 2020) and contributed 6%-7% of its dividend income in 2019. Moreover, Yuyuan and Fosun Tourism Group are both listed companies with good access to funding, and we see limited need for Fosun to infuse more capital.
Diverse funding channels and proven access to markets should temper the risk of a high proportion of short-term debt. We see Fosun's high exposure to short-term debt as a risk, especially in the currently volatile capital market. As of end-2019, Fosun had 42% short-term and 58% long-term debt at the holding company level. That said, Fosun's good relationships with both domestic and overseas banks and its thus far good access to the capital market should mitigate the risks. In addition, the company's marketable securities, valued at RMB35.5 billion at end-2019, could provide some liquidity support. Even if Fosun does not liquidate the positions, the company could still pledge those shares for loans when needed.
Weak operating cash flow poses risks to Fosun's LTV ratio, and its commitment to control debt is yet to be tested. Fosun's dividend income has been low relative to its portfolio size, with a dividend yield of less than 2%. This is because a large number of the company's investees are still in the growth stage and prefer reinvestments over distributing earnings. Therefore, we believe Fosun will raise additional debt of RMB6 billion to fund the operating cash flow deficit, which translates to a 2-3 percentage point increase in the LTV ratio. The company's financial policy is to maintain an LTV ratio of 35%-40% by managing its debt level. It could do this by using cash from asset disposals to fund investments or operating expenses. However, the commitment for, and execution of, this policy is yet to be tested because Fosun's target on investment return could limit its pace of divestment.
The stable outlook reflects our expectation that Fosun will maintain good access to funding channels over the next 12 months. The stable outlook also reflects our expectation that the company will fund the majority of its investment with proceeds from asset disposals. In our view, at the current rating level, Fosun should be able to endure a short-term spike in the LTV ratio to marginally over 45% due to market volatility.
We may lower the rating if Fosun's access to bank funding or capital markets weakens or the company fails to generate sufficient cash from asset disposals to fund its acquisitions. We may also lower the rating if Fosun's LTV ratio exceeds 45% for a prolonged period.
We may raise the rating if Fosun improves its listed asset weighting to closer to 50% and maintains its LTV ratio sufficiently below 40%. An upgrade assumes that the company improves its capital structure with a longer weighted-average debt maturity. Related Criteria
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• Criteria | Corporates | Industrials: Methodology: Investment Holding Companies, Dec. 1, 2015
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
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Primary Credit Analyst: Cher Chen, Hong Kong (852) 2533-3569;
Secondary Contact: Clifford Kurz, Hong Kong (852) 2533-3534; [email protected]
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