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Chinese self-proclaimed Warren Buffett is chasing Fosun’s $40 billion debt

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Chinese billionaire Guo Guangchang, whose global empire includes French resort group Club Med, Portugal’s biggest bank and English football club Wolverhampton Wanderers, was one of the last male survivors.

A decade ago, Fosun Guo, along with conglomerates HNA, Dalian Wanda, CEFC and Anbang, sparked an explosion of offshore Chinese investment, but most of it was canceled after President Xi Jinping announced the time for debt-driven takeovers.

Guo survived the persecution. But now he’s back in the spotlight after a sudden sell-off in property bonds brought scrutiny to a liquidity crisis and $40 billion in debt at his sprawling conglomerate.

Moody’s, a ratings agency, has begun reviewing the Shanghai group to see if contagion risk spreads to a portfolio that includes dozens of companies in China, Europe and the US, as well as hundreds of smaller subsidiaries.

The fall in Fosun’s bonds saw the company’s two dollar-denominated bonds traded in Hong Kong fall more than 35% in mid-June before recouping last week’s losses.

The strain on Guo’s empire was not only caused by higher interest rates and worsening consumer sentiment, but also by “unknowable political risks,” said Victor Shi, professor of Chinese political economy at the University of California.

“Private entrepreneurs in China continue to face this very opaque and difficult to predict political risk because no one knows if they are going to conflict with the authorities,” Shi said. “It’s just extremely difficult to know if private entrepreneurs are going to get into trouble.”

The huge challenge facing Guo marks the latest turning point in opera life. But rising questions over Fosun’s debt underscore how turbulence in China’s real estate sector is spilling over into the country’s corporate landscape and hurting investors and assets abroad.

“Fosun has a weak financial profile. The company’s regular income, mainly dividends from the underlying investments, is insufficient to cover interest and operating expenses at maturity. [holding company] level,” Moody’s analysts say.

Fosun’s total consolidated debt is 260 billion yuan ($38 billion), Moody’s said, adding that about 45% of its holding company-level debt is due by the end of March 2023. onshore loans, but excluding various consolidated debts of investees.

Refinancing through the offshore dollar bond market – in the past a key channel for Chinese developers to attract investors – is difficult for Fosun because funds from Chinese companies have evaporated after a series of defaults, including by property developer Evergrande, which has $300 billion or more. in liabilities.

Xiaoxi Zhang, a financial sector analyst at research group Gavekal, said that not only were Chinese property developers “shut down” for months on the offshore bond market, but Chinese investors were “more than ever” turned away from companies like Fosun. without government support.

“Those with cash tight may soon run out of cash as refinancing is difficult and therefore may default on bonds,” she said.

Investment portfolio breakdown bar chart (%) showing the concentration of Fosun's assets

Fosun told the Financial Times it is in a “robust and healthy position”, citing a debt-to-equity ratio of 54% and a total cash, bank balances and term deposits of 96.78 billion yuan at the end of 2021.

“[Fosun] and its subsidiaries have established partnerships with more than 100 Chinese and foreign banks around the world and have signed strategic cooperation agreements with many international banks and several Chinese banks,” he added.

The group also announced plans to buy back the outstanding principal of two offshore bonds maturing this year totaling approximately $800 million.

According to Citi analysts, Guo and his top aides said they plan to use existing cash and credit resources, as well as sell assets to meet their obligations.

Illustrating Guo’s increased efforts to maintain liquidity, the company’s sales this year are already in excess of $2 billion, compared with $85 million last year and $420 million in 2020, according to Dealogic.

In March, Fosun entered into a deal to sell its fashion division to the Lanvin Group through a special acquisition company. A few weeks later, the company agreed to sell its American insurance group AmeriTrust to the American provider AF Group. At the end of May, Fosun sold its last stake in Tsingtao Brewery for $523 million.

The Group is also selling interests in infrastructure investments by selling shares in Zhongshan Public Utilities and Shandong Taihe Water Treatment Technologies.

Moody’s noted that the company’s credit profile, which directly affects its ability to refinance, is likely to deteriorate as continued asset sales would mean lower dividend income and a smaller portfolio. But others, including Morgan Stanley and Japan’s Daiwa Securities, argue that the market overreacted to Moody’s move to revise the company.

Guo, who began life in eastern Zhejiang during the impoverished chaos of Mao Zedong’s Cultural Revolution, showed a strong survival instinct.

After a poor rural upbringing, he entered Shanghai’s elite Fudan University and then went on to build one of China’s largest private companies. As of Friday, he was worth over $4.2 billion, according to Forbes.

Overseas, the acquiring conglomerate included among its investments Hollywood film production venture Studio 8, New York’s One Chase Manhattan Plaza, Canadian circus operator Cirque du Soleil and British travel company Thomas Cook, though the latter two failed.

At home, where Guo remains a household name, Fosong has amassed a sizable real estate portfolio, a stake in Minsheng Bank, one of the country’s largest private lenders, and a major pharmaceutical arm that is partnering with BioNTech in a bid – so far unimplemented – to bring Covid vaccines to China. -19.

Chart showing the sales rate of Fosun in 2022

The group’s main remaining assets are stakes in more than 40 companies in healthcare, tourism, asset management, mining, steel and technology. In 2021, the group’s total revenue was 161 billion yuan and its assets were 806 billion yuan, according to the company.

However, according to analysts, unresolved issues related to the lack of transparency and complex structure hang over the group. These are the problems that have been the hallmark of the collapsed Chinese conglomerates.

Fosun has been among the groups dubbed “grey rhinos” for years because of the invisible but potentially huge risk they pose to China’s financial stability.

After the Xi administration announced in late 2016 that it was shutting down highly leveraged rhinoceros overseas investment, many tycoons went out of business.

At the end of 2016, Guo himself was suddenly detained by authorities in Shanghai for several days. After his detention, his company privately downplayed the incident as a routine investigation into the city’s then-vice mayor Ai Baojun, who was later jailed for bribery.

But one person familiar with Guo’s situation told the FT that the investigation was more serious and that when he resurfaced a few days later, the usually stolid billionaire told a group of fellow tycoons that the release was “the most special day” of his life.

Many of his peers were less fortunate. Xiao Jianhua, a mysterious financier with connections to Beijing’s top leadership, was kidnapped from Hong Kong’s Four Seasons Hotel in January 2017 and is believed to have been detained in Shanghai.

Wu Xiaohui, head of Anbang, was imprisoned for embezzlement. Last year, two senior executives from the travel and finance conglomerate HNA were arrested. Co-founder Wang Jian died in France in 2018. Ye Jianming, head of the state-backed conglomerate CEFC, has not been seen since his detention in early 2018.

Shi of the University of California said that Guo’s future depends in part on whether his key political connections, most of whom are believed to be Shanghai’s party and business elite, continue to have influence.

“I think he still has some degree of protection. But the 20th Congress of the Communist Party could mean the end of the Shanghai faction’s power,” Shi said. “On the other hand, he may have been cultivating new patrons.”

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