China’s self-proclaimed Warren Buffett is plagued by Fosun’s $40 billion debt

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

A decade ago, Guos Fosun, along with conglomerates HNA, Dalian Wanda, CEFC and Anbang, spurred an explosion in Chinese offshore investment, but most were rolled back after President Xi Jinping ended the debt-fueled takeover frenzy.

Guo survived the raid. But he’s back in the spotlight now after a sudden selloff in real estate bonds put a liquidity crunch and $40 billion in debt at his expansionary conglomerate under the microscope.

Rating agency Moody’s has launched a review of the Shanghai-based group over the risk of “contagion,” which is spreading to a portfolio that includes numerous companies in China, Europe and the US, as well as hundreds of smaller subsidiaries.

The failure of Fosun’s bonds caused two of the company’s Hong Kong-traded dollar bonds to fall more than 35 percent in mid-June before recouping losses over the past week.

The strains on Guo’s empire stemmed not only from higher interest rates and deteriorating consumer sentiment, but also from “unknowable political risks,” said Victor Shih, a 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 will run afoul of the authorities,” Shih said. “It’s just extremely difficult to know if a private contractor is going to get into trouble.”

Fosun International

The immense challenge facing Guo marks the latest twist in an operatic life. But mounting questions about Fosun’s debt obligations show how the turmoil in China’s real estate sector is spreading to the country’s corporate landscape, hitting investors and assets abroad.

“Fosun has a weak financial profile. The company’s recurring income, mostly dividends from its underlying investments, isn’t enough to cover its interest and operating expenses [holding company] level,” said analysts at Moody’s.

Fosun’s total consolidated debt stands at Rmb260 billion (US$38 billion), Moody’s said, adding that about 45 percent of its holding company-level debt will mature before the end of March 2023. S&P puts the debt of Fosun’s holding company at Rmb 112 billion, including offshore and onshore loans but excluding the debt of various consolidated holding companies.

Refinancing through the offshore dollar bond market — historically a key channel for Chinese developers to attract investors — is difficult for Fosun as funds for Chinese companies run out after a series of defaults, including real estate developer Evergrande, which has more than 300 USD billion or more have gone sour on liabilities.

Xiaoxi Zhang, a financial sector analyst at research group Gavekal, said not only have Chinese real estate developers been “locked out” from the offshore bond market for months, but investors in China are “more than ever” turning their backs on companies like Fosun without government support.

“Those who are in a tight liquidity situation could soon run out of money as refinancing is difficult and therefore default on bonds,” she said.

Bar chart of investment portfolio breakdown (%) showing Fosun's asset concentration

Fosun told the Financial Times that it is in a “solid and healthy position,” citing a debt-to-capital ratio of 54 percent and cash, bank balances and time deposits totaling Rmb96.78 billion at the end of 2021.

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

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

According to analysts at Citi, Guo and his top lieutenants have signaled plans to use existing cash and credit facilities and asset sales to meet their obligations.

According to data from Dealogic, the company’s divestitures already exceed $2 billion this year, compared to $85 million last year and $420 million in 2020, illustrating Guo’s increased efforts to strengthen liquidity.

Fosun agreed in March to sell its Lanvin Group fashion division through a special purpose entity. Weeks later, the company agreed to sell its US insurance group AmeriTrust to US provider AF Group. In late May, Fosun sold its remaining stake in Tsingtao Brewery for $523 million.

The group also divests stakes in infrastructure investments and sells stakes in Zhongshan Public Utilities and Shandong Taihe Water Treatment Technologies.

Moody’s noted that the company’s credit quality, which directly affects its ability to fund itself, would likely be weakened as continued divestitures would mean lower dividend income and reduce the size of its portfolio. But others, including Morgan Stanley and Japan’s Daiwa Securities, argue that the market overreacted to Moody’s move to review the company.

Guo, who began his life in eastern Zhejiang Province during the poverty-ridden chaos of Mao Zedong’s Cultural Revolution, has demonstrated a strong instinct for survival.

After a poor rural upbringing, he gained admission to the elite Fudan University in Shanghai and then set out to build one of China’s largest private companies. According to Forbes, his net worth is valued at more than $4.2 billion as of Friday.

Abroad, the acquiring conglomerate’s investments included Hollywood film production company Studio 8, New York’s One Chase Manhattan Plaza, Canadian circus operator Cirque du Soleil and British tour company Thomas Cook, although the latter two failed.

Back home, where Guo remains a household name, Fosun has amassed a sizable real estate portfolio, a stake in Minsheng Bank, one of the country’s largest private lenders, as well as a large pharmaceutical division that BioNTech has backed in a bid — not yet realized – to bring Covid-19 vaccines to China.

Chart shows how Fosun's divestitures will gain momentum in 2022

The group’s main remaining assets are interests in more than 40 companies in the healthcare, tourism, asset management, mining, steel and engineering manufacturing sectors. In 2021, the group’s total revenue was Rmb161 billion and its assets were Rmb806 billion, according to the company.

According to analysts, however, there are still unanswered questions about the group, which can be attributed to a lack of transparency and complicated structures. These are problems that have characterized failed Chinese conglomerates.

Fosun has for many years been among the groups dubbed the “gray rhinos” for the unseen but potentially immense risk they pose to China’s financial stability.

After the Xi government ended heavily leveraged foreign investments by rhinos in late 2016, many tycoons went out of business.

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

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

Many of his colleagues were less fortunate. Xiao Jianhua, the enigmatic financier with ties to top Beijing executives, was kidnapped from the Four Seasons Hotel in Hong Kong in January 2017 and is believed to be arrested in Shanghai.

Anbang head Wu Xiaohui was arrested for embezzlement. Two top executives at travel-to-finance conglomerate HNA were arrested last year. Co-founder Wang Jian fell to his death in France in 2018. Ye Jianming, head of state-backed conglomerate CEFC, has not been seen since his arrest in early 2018.

Shih of the University of California said Guo’s future depends in part on whether his key political connections – most of whom are believed to be Shanghai party and business elites – still hold influential positions.

“I think he still has some level of protection. But the 20th Congress of the Communist Party could spell the end of the Shanghai faction’s power,” Shih said. “On the other hand, he may have cultivated new supporters.”