Hong Kong, October 25, 2022 -- Moody's Investors Service has downgraded to B2 from B1 the corporate family rating (CFR) of Fosun International Limited (Fosun).
At the same time, Moody's has also downgraded to B2 from B1 the senior unsecured bonds issued by Fortune Star (BVI) Limited and unconditionally and irrevocably guaranteed by Fosun.
Moody's has changed the outlook on all ratings to negative from ratings under review.
This concludes the review for downgrade initiated on 30 September 2022.
"The downgrade reflects Fosun's weak liquidity, recent fast and significant decline of the market value of its listed assets which erodes its funding headroom, and the execution risk related to the company's fundraising plans amid capital market volatility and prevalent risk averse sentiment. We are also concerned that accelerated divestments or pledge of good quality assets will lead to a faster-than-expected weakening of Fosun's portfolio size and quality, as well as its financial flexibility, which no longer supports its previous B1 rating," says Lina Choi, a Moody's Senior Vice President.
The negative outlook reflects the refinancing uncertainties and execution risks of asset sales to repay Fosun's sizable debt maturing over the next 12 months, and the company's ongoing challenges in balancing liquidity needs and maintaining its investment portfolio quality.
RATINGS RATIONALE
Fosun's liquidity is weak at the holding company (holdco) level. Its cash on hand at the holdco level is insufficient to cover its short-term debt maturing over the next 12 months. In addition, its recurring income, which comprises mainly dividends from underlying investments, is inadequate to cover interest and operating expenses.
Moody's expects Fosun to face difficulties in refinancing its sizable short-term debt in public bond markets, both onshore and offshore, given the current weak market sentiment. A meaningful proportion of the company's sizable debt at the holdco level consists of onshore and offshore public bonds. Fosun's holdco has not issued unsecured long-term public bonds since the beginning of 2022.
Fosun has increased asset divestures to raise funds to repay debt. These include sales of small stakes in Shanghai Fosun Pharmaceutical (Group) Co Ltd and Shanghai Yuyuan Tourism Mart Co., Ltd, and most recently, the intended bulk sale of its stake in Nanjing Nangang Iron & Steel United Co., Ltd.
Moody's believes that the accelerated asset divestures will reduce the size of Fosun's investment portfolio. As listed assets or those of good quality are generally easier to be disposed of, divestures of such assets will lead to a quicker-than-expected weakening of Fosun's portfolio quality by reducing its asset diversification, portfolio transparency, and dividend income, which no longer support its previous B1 rating.
Moody's also estimates that the market value of Fosun's key holdings decreased by around 30% between the end of June and 20 October due to the combined factors of shareholding dilution and market value decline. The drop in the market value of its key holdings alone drove a contraction of around 10% from the estimated portfolio value as of the end of June 2022.
In addition, Fosun's portfolio is largely unencumbered so far, giving it the flexibility to raise funds through asset pledges. However, asset pledges for new financing, if implemented on a large scale, will decrease the unencumbered assets available for Fosun's unsecured lenders. A combination of a lower market value of the portfolio and reduced unencumbered assets will weaken the company's financial flexibility.
The B2 CFR continues to reflect Fosun's (1) large investment portfolio, (2) proven investment track record and slower debt-funded expansion, and (3) sizeable holdings of marketable securities and active asset-recycling activities. Such strengths are counterbalanced by (1) Fosun's weak liquidity and heightened refinancing risk, (2) potential weakening of portfolio size and quality along with asset divestments, (3) credit contagion risk from some weak subsidiaries, and (4) complicated group structure and inadequate information transparency.
In terms of environmental, social and governance (ESG) factors, Moody's has considered the company's aggressive financial policy, complicated organizational structure, limited transparency at the holdco level, and concentrated ownership. Fosun has a financial policy that tolerates high risk as indicated by the company's weak liquidity management and high reliance on short-term debt to fund long-term investments. Fosun is controlled by its founder and chairman, Guangchang Guo, who ultimately held a 62% stake in the company as of December 2021. The concentrated large shareholder ownership indicates the major shareholder could materially change the company's financial policy and strategy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a rating upgrade is unlikely in the near future. However, the outlook could return to stable if Fosun (1) strengthens its liquidity position, including materially improving its cash to short-term debt ratio, reducing its reliance on short-term funding and regaining access to long-term public bond markets, (2) executes the asset divestments and other fundraising successfully to adequately meet refinancing needs, (3) maintains stable and good access to bank facilities, (4) maintains a stable business and financial profile at the holdco level, such that the diversification and transparency of its investment portfolio remain largely stable, its adjusted (funds from operations [FFO]+interest)/interest and market value-based leverage stay steady, and unencumbered asset ratio does not materially drop; and (5) largely contains the contagion risk from its key investees.
Moody's could downgrade Fosun's rating if (1) the company's access to funding remains weak, as indicated by Fosun having limited access to the bond market for a prolonged period or difficulty in renewing or obtaining bank facilities; (2) its asset divestures cannot proceed to meet its funding needs due to market volatility, execution uncertainty and regulatory reasons; (3) the company's business and financial profiles weaken. This would be indicated by a deterioration in its portfolio quality after asset divestures, lower recurring income at the holdco level, and a material drop in listed and unencumbered assets of the portfolio, with a further weakening in its adjusted (FFO+interest)/interest, or its market value-based leverage; or (4) contagion risk from key investees increases.
The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in July 2018 and available at https://ratings.moodys.com/api/rmc-documents/56472. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Fosun International Limited (Fosun) has diversified businesses spanning four broad categories: (1) integrated finance; (2) tourism, leisure and consumer; (3) pharmaceuticals, medical services and health products and (4) resources, environment and technology.
The estimated market value of Fosun's investment portfolio totaled around RMB271 billion as of the end of June 2022. The consolidated group's revenue totaled RMB174 billion in the last 12 months ended June 2022.
Fosun is headquartered in Shanghai and listed on the Hong Kong Stock Exchange in 2007.
The local market analyst for these ratings is Sue Su, +86 (10) 6319-6505.
REGULATORY DISCLOSURES
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
