- Recently, bond prices of Fosun International ("Fosun") plunged, with "FOSUNI 6.850% 02Jul2024 Corp (USD)" on Bond Express falling sharply to around $67.
- The panic selling was triggered by Moody’s credit report released on 14 June, stating that Fosun’s liquidity at the parent company level is weak. Its cash is insufficient to repay the short-term debts due in the coming 12 months. It is more difficult to refinance onshore and offshore bonds. The downturn in the property sector has also increased the pressure on liquidity of Fosun’s subsidiary, Fosun Property Holdings, which brings a certain degree of contagion risk. As such, Moody’s has placed Fosun’s Ba3 rating on the list of review for downgrade.
- Fosun proposed a tender offer for two offshore bonds. One is puttable in August 2022 and the other will mature in October 2022, with the outstanding amount of USD 380 million and EUR 384 million respectively. Initially, the maximum acceptance amount of the tender offer was USD 200 million. Later on, Fosun upsized the tender offer to Any-and-All to restore market confidence.
- It is noted that there were rumours regarding Fosun’s RMB 600 billion liabilities. In fact, this is just the total liability amount under Fosun’s consolidated statement (2021 year-end: RMB 603 billion), and not the actual debt to be repaid by Fosun itself at the parent company level. The 600 billion includes the non-interest bearing liabilities and interest-bearing debts of Fosun’s subsidiaries (such as Shanghai Yuyuan Tourist Mart, Fosun Pharma, numerous insurance companies, and Fosun Property Holdings). In theory, Fosun is not liable for all the liabilities or debts of these subsidiaries.
- Actually, Fosun’s cash to short-term debt ratios at the parent company level were maintained at less than one over several years (Table 1). This is not equivalent to having liquidity problem, it is instead a natural result brought by Fosun’s business model. Conglomerates like Fosun generally avoid holding too much idle capital. They tend to invest most of their capitals into their existing businesses, new businesses and or financial products. With proper capital allocation, the return on invested capital can improve. Therefore, the low level of cash at the parent company level should not be a sound reason of accusing Fosun of having liquidity issues.
Table 1: Fosun’s Credit Indicators at the Parent Company Level
|
2017 |
2018 |
2019 |
2020 |
2021 |
|
|
Cash & Bank Deposits (RMB billion) |
6.16 |
4.17 |
6.88 |
9.82 |
6.38 |
|
Short-term Debts (RMB billion)* |
9.80 |
7.62 |
12.90 |
10.18 |
9.82 |
|
Total Debts (RMB billion)* |
20.49 |
25.81 |
26.32 |
29.36 |
27.59 |
|
Cash To Short-term Debts (times)* |
0.63 |
0.55 |
0.53 |
0.96 |
0.65 |
|
Sources: Company Reports, iFAST Compilations Data as at 31 December 2021 |
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- Nonetheless, whether or not the reasons for the decline are justified, a sell-off of its bonds has happened due to the lack of market confidence. Indeed, this had an impact on Fosun’s liquidity. The most obvious reason is the tightening of refinancing channels. It leads to a difficulty in issuing bonds in the public market. The Group cannot repay the debts by bond refinancing.
- If we take into account the two USD bonds, one puttable in August 2022 and one due in October 2022, Fosun’s adjusted short-term debt at the parent company level is at around RMB 15.1 billion. The liquidity gap (i.e. adjusted short-term debt minus cash and bank deposits) is roughly at RMB 8.7 billion, which truly puts liquidity pressure on Fosun.
- Under an extreme scenario, even Fosun is completely unable to obtain new bank or bond refinancing, it is still possible that Fosun will make through the crisis. Partial sales of its listed holdings (current market value of RMB 102.3 billion), even at a discount, are still more than sufficient to cover its total debts at the parent company level (around RMB 27.6 billion) as well as its offshore bonds maturing in or prior to 2024 (around RMB 19.5 billion), not to mention other funding methods like rights issues, share placements, dividends from subsidiaries or borrowing from subsidiaries to cover the funding gap. Yet, a certain degree of execution risk exists.
Table 2: Fosun International’s Equity Value of its Listed Subsidiaries
|
Company Name |
Market Capitalisation |
Group’s Ownership* (%) |
Equity Value (RMB billion) |
|
Fosun Pharma |
RMB 104.2 billion |
40% |
41.7 |
|
Shanghai Yuyuan Tourist Mart Company |
RMB 35.2 billion |
68% |
23.9 |
|
Nanjing Iron & Steel |
RMB 19.5 billion |
59% |
11.5 |
|
Hainan Mining |
RMB 17.4 billion |
52% |
9.1 |
|
Fosun Tourism Group |
HKD 12.6 billion |
81% |
8.7 |
|
Banco Comercial Português (BCP) |
EUR 2.6 billion |
30% |
5.5 |
|
Beijing Sanyuan Foods Company |
RMB 7.6 billion |
20% |
1.6 |
|
Babytree Group |
HKD 1 billion |
29% |
0.3 |
|
Total |
102.3 |
||
|
*Only Fosun International’s direct shareholding is counted Sources: Company Reports, Bloomberg Finance L.P, iFAST Compilations Data as at 24 June 2022 |
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- Fosun should liquidate some ownerships of its subsidiaries to prepare for the repayment of bonds and to buy itself some more time to regain investor’s confidence. In the medium-to-long-term, if Fosun does not have the market confidence back and it is not able to refinance through bond issuance, Fosun might dispose of some major or full stake in its core subsidiaries to deleverage at the parent company level.
- Investors could pay closer attention to whether the Group dispose its assets, especially the listed shares directly held by the Group, as mentioned in Table 2.
- Investors who are more aggressive can consider the bond due in or prior to 2024 to take advantage of the extremely high yield opportunities due to the sell-off. The bond, FOSUNI 6.850% 02Jul2024 Corp (USD), due in July 2024, is currently yielding at 32%. Conservative investors who could “wait-and-see” until there is the Group’s further action.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a FOSUNI 6.850% 02Jul2024 Corp (USD) position and the analyst who produced this report holds a NIL position in the abovementioned securities.
