Fosun International Ltd. could further consolidate its investment portfolio and lower debt at the holding-company level over the next six to 18 months, after paying concentrated maturing bonds in the past nine months with proceeds from asset sales and domestic bank loans.
The company's diversified asset base for monetization and access to non-direct funding channels mitigate the pressure on its capital structure, as public markets remain practically shut for Chinese privately-owned companies.
Reflecting this, we revised the rating outlook to stable from negative. At the same time, we affirmed our long-term issuer and issue credit ratings on Fosun at 'BB-'.
The stable rating outlook reflects our expectation of moderating refinancing risk and further deleveraging via asset recycling over the next 12-18 months.
HONG KONG (S&P Global Ratings) May 30, 2023—S&P Global Ratings today took the rating actions listed above.
Fosun could continue to rely on asset sales and domestic banking support to reduce its debt burden. We anticipate the China-based investment holding company will continue to deleverage over the next 18 months amid capital-market headwinds and its own balance-sheet rationalization. It paid maturing bonds in the past three quarters with proceeds of over Chinese renminbi (RMB) 30 billion from asset disposals and bank loans. This brought down holding-company debt by about RMB24 billion to RMB93 billion as of end-March 2023, from mid-2022 levels.
We see marginally better refinancing conditions since our downgrade of Fosun in September 2022. Onshore policy support has become more forthcoming and China's COVID exit has stabilized operating conditions, although risks of rate hikes in the U.S. and global and local credit developments still leave confidence low in offshore markets.
Assuming the operating environment does not change much until the end of the year, we forecast Fosun's holding-company debt could further drop to RMB75 billion-RMB85 billion. The company will likely continue to pay bond maturities with more sales proceeds and bank credit lines.
A diversified portfolio provides headroom for asset sales, although capital-market and counterparty risks remain. Fosun had a portfolio value of RMB230 billion-RMB250 billion in the past six months, with a loan-to-value (LTV) ratio of 35%-40%. After the recent round of deleveraging, we expect the company to focus on core assets. Its portfolio could therefore shrink to RMB170 billion-RMB 190 billion, with the LTV approaching 30%. This assumes key investees maintain stable operations and share prices.
While we see the potential for comparable disposal proceeds this year, success will depend on management's commitment and execution. The ongoing saga surrounding the sale of Fosun's steel investee, Nanjing Nangang Iron & Steel United Co. Ltd., underscores the complexity of large-scale transactions.
Bank loans will be an increasingly important funding and liquidity channel for Fosun. Stable banking relationships enabled the company to navigate turbulence in onshore and offshore high-yield markets in the past year. The share of bank loans in the holding company's debt rose to 54% as of end-2022 and 60% as of end-March 2023, from 46% in mid-2022. We expect the number to rise to 65%-70% by end-2023.
Higher exposure to bank lending and stable banking relationships could lower funding volatility for Fosun. The company secured a RMB12 billion onshore syndicate credit line by pledging shares in Shanghai Fosun Pharmaceutical (Group) Co. Ltd. in January 2023. In our view, it can obtain more such secured financing if needed.
We estimate secured debt at the holding-company level could further rise to about a quarter of total debt over the next six to nine months, from 14% as of end-March. Longer-tenor financing via such non-direct lending channels has tempered the pressure on Fosun's debt maturity profile, year to date.
Fosun's liquidity pressure has eased, although material improvements will require more proactive management.After navigating past its maturity wall, the company's short-term bond maturities more than halved to RMB13 billion as of end-March, from mid-2022 levels. The company should be able to cover the onshore portion with its committed syndicate credit line, of which RMB6.1 billion was undrawn as of end-May 2023.
That said, Fosun will still face a significant shortfall between cash on hand of about RMB10 billion and short-term maturities of RMB47 billion. We continue to view the company's liquidity as less than adequate. The company has demonstrated sound banking relationships with a good record of rolling over debt in recent years. Its liquidity management hinges on maintaining this capability.
Fosun's liquidity may only recover to an adequate level after building up its holding-company cash balance and regaining its ability to issue longer-tenor notes in bond markets.
Portfolio quality remains the cornerstone of holding-company creditworthiness.Fosun's portfolio asset risk has increased modestly over the past 12-18 months, amid unfavorable macroeconomic conditions. Most of the company's Greater China assets should benefit from China's post-pandemic recovery from 2023. Some of its key portfolio companies are also actively recycling assets to fund their investment and operational needs. On the other hand, investees with businesses in financial institutions and global commercial real estate could continue to face capital-market volatility and asset depreciation pressure.
Listed assets in Fosun's portfolio dropped to 35%-38% of the total in the past six months. This followed share sales and price declines. Given that the company could sell more unlisted investees this year, its portfolio liquidity may gradually recover.
Recent negative headlines on investee companies (such as Babytree Group) as well as the legal battle surrounding the sale of Nanjing Nangang also reflect the need for Fosun to step up stakeholder management. We do not expect a material impact on the holding company's operations or funding access, although there could be implications on the company's standing in capital markets if similar issues surface in the future.
The stable rating outlook reflects our view of easing refinancing risk, after Fosun navigated its maturity wall. We expect the company to continue recycling assets to further reduce holding-company debt and increase financial buffer.
We may lower the ratings if Fosun's portfolio divestments stall, reversing its deleveraging trend.
We could also lower the ratings if Fosun's liquidity position weakens again.
We would raise the ratings if Fosun's LTV ratio drops below 30% for an extended time, and its weighted average maturity extends well above two years in a sustainable manner. This assumes the company has comfortable cash sources over uses of over 1.2x.