Investors are stepping up scrutiny of Fosun group, one of China’s largest private-sector conglomerates, as it faces as much as about $8 billion in bond repayments through 2023 following signs of distress in credit markets.
Some of Fosun’s dollar bonds were on pace for record lows Wednesday, falling as much as 6 cents after day-earlier declines that were the biggest since a rout in June, when broader fears of contagion from a crisis in China’s property debt flared. Shares of Fosun International, the group’s most-important arm, dropped to a decade low.
Authorities including banking watchdog China Banking and Insurance Regulatory Commission have told large lenders and state-owned enterprises to start a round of checks on their financial exposure to Fosun, people familiar with the matter said earlier this week. The group’s businesses span everything from Club Med to French fashion house Lanvin and the exclusive distributor of BioNTech SE’s Covid vaccine in Greater China.
The Beijing branch of the State-owned Assets Supervision and Administration Commission asked local state-owned enterprises for details about their links to the Fosun group that include stock holdings, debt lending and guarantees, according to the people.
Fosun said in a statement Wednesday that the CBIRC didn’t ask banks to check their financial exposure to Fosun, and the banks that worked with Fosun didn’t receive any notice about this after checking with regulators via “various channels.” CBIRC didn’t immediately respond to a Bloomberg request for comment.
Moody’s Investors Service downgraded the conglomerate’s flagship operation further into junk territory in August for reasons including “elevated refinancing pressure” and risks related to plans to divest assets. Fosun entities disclosed intentions earlier this month to pare their stakes in the group’s publicly listed tourism and pharmaceutical units.
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What is the company?
Co-founded by tycoon Guo Guangchang in 1992, the consumer-focused group’s early operations included pharmaceuticals and real estate before ultimately entering businesses including tourism and finance.
The firm was among a group of prolific overseas acquirers met with tightened regulatory scrutiny last decade alongside fellow conglomerates like HNA Group Co. and Dalian Wanda Group Co.. But Fosun dodged the brunt of an ensuing crackdown and shifted its focus to deals that fit better into its core businesses.
First-half earnings at Fosun International fell 33% from a year earlier and debt increased 10% from the end of 2021.
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Bonds guaranteed by Fosun International have fallen anew this week
What’s happening?
Several Fosun group entities have been planning to pare stakes in other publicly held Fosun businesses. The tourism arm’s shares plunged a record 21% on Sept. 6 as Fosun International sold a 2% stake at a 15% discount to previous market prices. Stakes in a miner and a liquor company were also sold off in recent weeks while another entity plans to sell as much as 3% of Shanghai Fosun Pharmaceutical Group Co.
The moves have raised concerns about how Fosun will balance liquidity needs. Cash holdings at Fosun International were 117.7 billion yuan ($16.9 billion) as of June 30 while total liabilities were 651 billion yuan, 40% of which was interest-bearing borrowings. Some offshore bonds guaranteed by the firm have dropped below 45 cents on the dollar, well into what’s considered distressed territory.
Why does it matter?
Record defaults in China’s high-yield dollar bond market this year have shut most junk-rated issuers from the primary offshore market, squeezing their available funding channels and liquidity. While Fosun International hasn’t sold any notes this year, according to Bloomberg-compiled data, other Fosun operations have issued US$1.25 billion of mostly onshore bonds.
The Fosun group faces some US$8 billion of bonds that either mature or can be redeemed early by investors by the end of next year, many of them onshore.
What does the company say?
Fosun said in its statement Wednesday that the company got the information about the CBIRC after checking with regulators via “various channels,” without elaboration.
Fosun International Executive Director Gong Ping said Fosun’s recent share sale is aimed at optimizing asset portfolio, and isn’t a response only to the current market environment, according to the statement.
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A representative for the group said in a statement to Bloomberg on Tuesday that Fosun hadn’t received any notice from authorities about the requests. A subsequent query to the Beijing state asset regulator found the practice is part of its normal research and previously involved other companies, the representative said, adding that the group’s operations remain healthy and resilient to challenges.
Guo, the Fosun co-founder, said in a social-media post following visits to more than 20 countries that many of Fosun’s overseas units are now doing better than before the pandemic.
What do ratings firms and others say?
After putting it on review for downgrade in June, Moody’s cut Fosun International by a notch to B1 amid what analyst Lina Choi called the firm’s weak liquidity profile as cash at the holding-company level “is insufficient to cover its short-term debt maturing over the next 12 months.”
Private companies such as Fosun have fallen into a forced deleveraging cycle because of the debt woes in China’s property sector, according to Eddie Chia, portfolio manager at China Franklin Asset Management Co. “The overall risk aversion in both the onshore and offshore market means they are shut off from the capital markets,” prompting asset sales at Fosun, he said.
Meanwhile, the conglomerate’s various business lines have been more vulnerable to China’s economic slowdown and stop-start Covid lockdowns, said Bloomberg Intelligence credit analyst Dan Wang.
What are traders watching for next?
The group’s financing channels are a primary focus, especially for any potential bank lifelines. Fosun International refinanced and upsized a loan in June, and a month later signed a cooperation deal with Industrial and Commercial Bank of China Ltd. In August, REDD reported the bank was in talks with another Fosun entity for a loan of as large as 10 billion yuan. Progress on asset sales are also of key interest.
