Fosun International Ltd. #BB# Ratings Outlook Stable

Stocks and Financial Services Press Releases Monday May 28, 2018 17:43
HONG KONG--28 May--S&P Global Ratings

HONG KONG (S&P Global Ratings) May 28, 2018--S&P Global Ratings affirmed its 'BB' long-term issuer credit rating on China-based investment holding company, Fosun International Ltd. The outlook is stable. At the same time, we affirmed our 'BB' long-term issue rating on the outstanding guaranteed notes issued by the company's financing platform, Wealth Driven Ltd. and Fortune Star (BVI) Ltd.

We affirmed the ratings to reflect our view that Fosun will sustainably grow with a balanced investment and divestment strategy. We also expect the company to maintain a loan-to-value (LTV) ratio of 30%-40% over the next two years.

Fosun's well-diversified investment portfolio and the stable credit quality of its key investees support its fair investment position, in our view. Fosun's investment portfolio increased to about Chinese renminbi (RMB) 237 billion as of end-2017, from RMB204.6 billion in 2016, mainly due to appreciation in the value of its listed assets. The company's portfolio ranges from healthcare, insurance, consumer products, leisure to commodities in Asia-Pacific, Europe, and the Americas. This diversity could help Fosun to better navigate industry cyclicality and dilute risks in a single market. At the same time, most of its invested assets have sustainably growing operations with stable credit quality.

Fosun's asset liquidity is constrained by its large amount of unlisted investees. We expect these investees to account for less than half of Fosun's asset portfolio over the next two years, compared with 57.6% as of end-2017. Fosun's asset capitalization and IPO plans should temper the risk and allow flexibility of available-for-sale assets. Fosun's ongoing asset injection into listed investee company, Shanghai Yuyuan Tourism Mall, and more potential IPOs for some key assets should back the company's plan to improve asset liquidity. However, the timeframe of these plans are uncertain and they are unlikely to materialize in the next 12 months.

Fosun's short operating record in exiting investments is another risk to its investment profile. In the past years, the company has rapidly grown its assets portfolio through acquisitions. However, it has not made many exits to recycle cash for debt repayment.

In our view, Fosun has shown investment discipline by developing a set of investment policies, guidances for short-term financial tolerance, and a risk control system. Such an approach supports its investment capability, which we assess as neutral to our assessment of its investment position.

Fosun has a manageable leverage, in our view, with a LTV ratio of about 35% at the end of 2017. We take into account the company's legacy financial guarantees of about RMB3.6 billion to invested companies, which will be gradually replaced by new borrowings issued by the investee companies.

We expect Fosun to maintain its LTV ratio below 45% by rotating assets at a balanced pace. At the same time, the company's deleveraging and increasing dividend income should continue to improve its operating cash flow adequacy. These factors support our assessment of the company's financial risk profile as significant.

The stable outlook over the next 12 months reflects our expectation that Fosun would maintain a well-diversified asset portfolio and gradually improve its asset liquidity via asset capitalization and IPOs. The company's diversified portfolio should support its flexibility to navigate industry cyclicality and help avoid concentration risk in any single market. We expect the company will maintain its LTV ratio at 30%-40% while making investments and disposal plans.

We may lower the rating if Fosun's LTV ratio rises above 45% on a sustained basis. This could happen if: (1) the company pursues more aggressive debt-funded investments than we expect; (2) its asset valuation materially depreciates; or (3) Fosun keeps investing in assets with weak credit profiles, which makes asset rotation more difficult.

We would also consider a downgrade if the company's cash flow adequacy falls below 0.7x. This could happen if dividend and interest income materially decline.

A deterioration in liquidity could also trigger a downgrade. An indication of that would be a diminishing buffer of cash on hand and highly liquid investments against short-term borrowings and committed investments.

We may raise the rating if Fosun's LTV ratio remains below 30% on a sustainable basis. This could happen if the company continues to reduce debt, or its portfolio value appreciates.

We would also consider an upgrade if Fosun's asset liquidity materially improves, although we view that as a remote event in the next 12 months. Nevertheless, that could happen if Fosun accelerates capitalization of its portfolio assets through IPOs, leading to listed assets accounting for more than 60% of its overall portfolio value.

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