S&P lowers Fosun International’s ratings

Cut from "BB+" to "BB" underlines need for China’s largest privately owned investment company by revenue to control its leverage risks and diversify fundraising channels.

Fosun International has had its corporate credit rating and the rating on its notes cut from “BB+” to “BB” by Standard & Poor’s, which may impact the company’s future debt financing.

Moody’s Investors Service also said it would continue to review the company for a possible downgrade.

"We downgraded Fosun because we believe the company's already significantly increased leverage is unlikely to improve in the next 12 months," said S&P's credit analyst Huma Shi, after the company announced a rights issue to raise between HK$4.8 billion (US$619 million) and HK$5.18 billion.

Fosun International, the overseas unit of Fosun Group, China’s largest privately owned investment company by revenue, is expanding overseas through more debt-funded acquisitions.

In 2013 it invested US$1.2 billion in 34 new projects and in the last three years its reach has grown to 15 markets from two.

Its €1 billion (US$1.36 billion) acquisition of Caixa Seguros, Portugal’s largest insurer, has already raised some concerns and led to Moody’s and S&P placing the company under review for downgrade and on “CreditWatch” with negative implications, respectively.

“Fosun's mostly debt-funded acquisitions and the continued weak financial performance of its steel segment are largely responsible for the increase in leverage over the past year,” said Shi. “We expect Fosun to mostly use debt to fund a significant portion of the CSS acquisition, and realising synergies will take time.”

S&P expects the company’s EBITDA interest coverage to be 1.5x- 2.0x, broadly in line with the 2013 level. However, unless Fosun improves its financial risk profile so that its EBITDA interest coverage is more than 2.5x the agency will not raise the ratings.

The lowered ratings may dent Fosun’s ability to raise funds through debt, according to a Hong Kong-based analyst. The positive side is that the company has developed other channels of funding than its own capital resources and debt, the analyst said.

The other channels include private equity funds under its management, the investable funds of its insurance subsidiaries and third-party investors, according to Lina Choi, a Moody’s vice president and senior analyst as well as the international lead analyst for Fosun.

In addition to the rights issue, Shanghai Fosun Pharmaceutical, one of Fosun’s core subsidiaries, completed a private share placement of HK$1.8 billion in March, and the company also raised $500 million from a convertible bond last December.

Rating agencies are hopeful of an improvement in asset recycling and the funding situation of the company. “We consider [that] the acquisition of the insurance businesses in Portugal [will] improve its business profile as it will increase portfolio diversification and reduce Fosun's exposure to systemic risk in China over the medium term", says Kai Hu, a Moody's vice-president and senior credit officer.

Fosun also has confidence in its corporate financing. The company forecasts that its new Portuguese assets will generate €12 billion of investible funds this year, chief executive Liang Xinjun told FinanceAsia in an interview in March.

The company’s average funding cost for 2013 was 5.7%, lower than China’s benchmark one-year deposit rate of about 6%, said the company.


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