Fosun Group headquarters
in Beijing. Fosun acquired two U.S. insurance companies in more than
$2.2 billion deals. (GREG BAKER/AFP/Getty Images)
Standard & Poors (S&P) revised its outlook on Chinese conglomerate Fosun International Ltd. to negative from stable, on May 30.
“Fosun’s leverage has increased materially in the past year following
the completion of acquisitions,” stated the rating agency in its
report.
Fosun (0656.HK)
is a China-based conglomerate with businesses in both industrials and
financials. The group wants to become an insurance-led investment
holding company like Warren Buffet’s Berkshire Hathaway. Hence, it
started to expand its insurance business by acquiring Bermuda-based
insurer Ironshore Inc. and U.S.-based Meadowbrook Insurance Group in
2015.
“We expect Fosun’s insurance businesses will partly offset weakening
performance from its industrial operations and that the company will
maintain a diversified portfolio of businesses and assets with
satisfactory quality,” said S&P.
Industrial operations accounted for 81 percent of the company’s
revenue in 2015. However, with the recent acquisitions, insurance
segment’s contribution to the revenue will increase to 30 percent in
2016, according to S&P estimates.
The company’s debt-to-EBITDA (earnings before interest, tax, and
depreciation) ratio, which shows the leverage position for its
industrial operations increased to 16.8x in 2015 from 9.1x a year
earlier. This compares to an average debt-to-EBITDA ratio of 2.1x for S&P 500 companies.
The debt-to-EBITDA is a common metric used by credit rating agencies
to assess the probability of a company’s defaulting on its debt. The
higher the ratio, the more difficult it becomes for a company to pay off
its debt.
“The negative outlook reflects our expectation that Fosun’s leverage
will remain high over the next 12 months, despite a focus on
consolidating existing investments,” said S&P.
The rating agency also affirmed its long-term corporate credit rating
at ‘BB’, which is two notches below investment grade and lowered its
long-term Greater China regional scale rating one notch to ‘cnBB+’.
Fosun Group, led by Chinese billionaire Guo Guangchang,
appeared to owe much of its early success to the Chinese Communist
Party regime. But in recent years—as the Party grapples with internal
strife and economic uncertainty—the group has increasingly shed its
reliance on Party.
Fosun has moved capital aggressively out of China
in recent years, acquiring companies and real estate in Europe and
North America. The company acquired Ironshore Insurance and Meadowbrook
Insurance in more than $2.2 billion deals in 2015. It also bought companies like Club Med and Cirque du Soleil.
Its real estate arm acquired the 2.2 million-square-foot One Chase Manhattan Plaza in downtown Manhattan for $725 million in 2014. Fosun overall spent about $10 billion buying assets in developed markets since 2013, according to a report by Bloomberg.
Guo cites American investor Warren Buffett as an inspiration and
views Buffett’s Berkshire Hathaway as his Holy Grail. As far back as
2011, Guo had his sights set on Berkshire Hathaway. He referred to
himself as an “apprentice” of Buffett during an interview with CNBC.
“We’re learning from his investment methods. We hope to build on our own
strengths and become Buffett’s successful disciples in China,” Guo told
CNBC.
He is one of the Chinese tycoons being investigated in the anti-corruption campaign of
Chinese Communist Party (CCP) leader Xi Jinping. He disappeared for few
days in December 2015 and then reappeared after assisting authorities,
according to media reports. He is suspected of h intricate ties with the family and key aides of former CCP leader Jiang Zemin.
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