Fosun raises equity to ease debt concerns

Stock market darling raises $1.2 billion from a top up placement to mollify the rating agencies and fund the purchase of a US insurer.

Fosun International raised HK$9.3 billion ($1.2 billion) from an accelerated top up placement on Monday night to help fund the acquisition of US insurer Ironshore Holdings and remove potential pressure on its credit ratings. 

The negative ratings overhang has been sparked by its latest acquisition, the $1.84 billion to $2.1 billion purchase of the remaining 80% of Ironshore it does not already hold. Over the past two-years, China's largest privately held conglomerate has spent roughly $8 billion on an acquisition spree that is progressively turning it from an industrial to insurance-led investment holding company. 

However, the increase in debt deployed to pay for this transformation has prompted both Moody's and Standard & Poor's to flag the need for equity rather than more debt to fund the latest purchase. And on Monday night, Fosun responded with a transaction, which represents 6.22% of its enlarged share capital.

A $1 billion deal with a $200 million upsize option was marketed on an indicative price range of HK$19.48 to HK$20.32 per share. This represented a 3% to 7% discount to Monday's HK$20.95 closing price according to a term sheet seen by FinanceAsia.

Strong demand from 150 accounts enabled the group to upsize the deal to $1.2 billion and fix pricing of the 465 million shares in the middle of the range at HK$20 per share, a 4.5% discount to the close. 

About two thirds of the deal went to the top 25 accounts, led by China-domiciled funds, followed by hedge funds and Asian long-only. One fund manager told FinanceAsia he found the discount tight considering how much the stock has appreciated, but not completely unreasonable.

Year-to-date, Fosun has doubled in share price and over the past year, risen an even more impressive 220%. Since March 27, it is up 57.6%.

Much of this appreciation has been driven by Mainland investors who have not only been chasing momentum-driven stocks, but have an enthusiastic and nationalistic view of Fosun International as one of the chief standard bearers for China's 'Going Global dream'. The sheer volume of this purchasing power and the mentality behind it, has swamped Western fund managers with their more analytical, valuation driven approach. 

As such, trading volumes in Fosun International have spiked dramatically over the past two months. Earlier this year, the stock was trading about $15 million per day. By the end of March it was up to $66 million. 

This has made a big difference to the impact of the new placement. Based on January's trading volume, it represents 80 trading days. Based on end March trading volumes, it represents a far more palatable 18 days. 

At current levels, Fosun is trading at 15.83 times consensus 2015 earnings. 

Many international investment banks believe the risks and the rewards are now priced in the share price. On the plus side, this includes the company's successful and ongoing transformation, the A-share rally and the prospects for a domestic IPO by Focus Media in which it holds 17.4%.

Reducing leverage

The negative side of the equation is dominated by the company's leverage. Its 2014 results revealed negative operating cash flow of Rmb5.9 billion and short-term debt of Rmb50.18 billion, compared to cash and equivalents of Rmb40.19 billion. 

Following the Ironside announcement, Moody's told Fosun it would, "consider downgrading the rating if the company is unable to secure equity and asset disposals to strengthen cash at the holding company."

Fosun is currently rated Ba3/BB. At the end of 2014, the company reported a net debt to Ebitda ratio of 11.6 times and net debt to total equity ratio of 78.5%. 

However, its 2014 results surprised analysts on the upside, coming in 25% ahead of consensus forecasts. Net income rose 20% to Rmb6.9 billion.

The biggest growth driver was insurance, where Ebitda rose 225% year-on-year. Investable assets grew 20-fold over the space of the year thanks to a string of acquisitions including Portugal's Fidelidade and a second US insurer, Meadowbrook. 

As a result of the new Ironside transaction, analysts believe investable assets have grown from Rmb107 billion at the end of 2014 to Rmb134 billion. The company is targeting Rmb200 billion to Rmb250 billion by the end of 2015.

Fosun has been trying recycle much of this money into assets that appeal to China's middle classes. Insurance premiums now account for 50% of capital employed, up from 11% in 2013.

The company has a large portfolio of minority equity investments, some of which it may yet sell to reduce debt. These include a 10% stake in Greek jeweller Folli Follie, 16.7% of Sanyuan Foods and 2.3% of Minsheng Bank. 

Yet while insurance has been the focus, it still only represents 13% of the company's overall revenues. Industrial assets still predominate, with steel accounting for 44% of 2014 revenues and property 20%. 

Surprisingly, the group was able to grow Ebitda in its property division by 95% during 2014 even in the face of the property downturn. Analysts say this is because of its focus on mixed-use developments combining residential, retail and commercial. 

Management also argues that it has been able to make its acquisitions work with ROE at Portuguese insurer Fidelidade rising from 8% pre-acquisition to 14% at the end of 2014.

Bookrunners for the placement were Citigroup, CLSA, CMBI, Goldman Sachs, Hani Securities, Morgan Stanley and UBS. Fosun will now be subject to a 90-day lock up. 

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