BCP's Knight Has Borrowed Armor

The Portuguese lender is selling a stake to Fosun, a conglomerate that is itself heavily leveraged.
At Closing, April 23rd
16.58 HKD

Desperation can sometimes get you deeper into the kind of trouble you're fleeing from. 

The announcement over the weekend that Banco Comercial Portugues SA, Portugal's largest publicly traded lender, agreed to sell a 16.67 percent stake for 174.6 million euros ($185 million) to Fosun International Ltd. may be such a case.

At first glance, the cash injection is a welcome relief for a bank that saw its common equity Tier 1 capital ratio drop to 9.5 percent in September from 10 percent a year earlier. However, the fact that it's coming from a Chinese conglomerate that is itself highly leveraged should give Lisbon regulators pause.

At the end of June, Fosun had 119 billion yuan ($17 billion) of debt, with more than a third due within one year and over half payable before July 2018. What's even more concerning, as Gadfly's David Fickling pointed out in August, the company is burning cash.

Borrowing Machine

Fosun has gone on an international shopping spree that has seen it set foot on every corner of the globe. It was mostly done with borrowed cash, however

Source: Bloomberg

To be sure, Moody's gives Fosun a Ba3 rating, one level higher than the B1 grade BCP currently sports. And the Chinese company's chairman, Guo Guangchang, is already a familiar face among Portuguese regulators after Fosun bought the insurance arm of state-owned bank Caixa Geral de Depositos in 2014.

Guo has every reason to celebrate. The acquisition will cement his group's financial institution footprint in the Portuguese-speaking world. Aside from Caixa's insurer, Guo this year took over Rio Bravo Investimentos in Brazil, an asset manager founded by former central bank head Gustavo Franco.

Plus, it's coming very cheap. The 1.1089 euro per share price is only 1.3 percent higher than the all-time low that BCP's stock reached on Sept. 23. It also implies a price to book ratio of less than 0.22 times.

Knockdown Price

Fosun is paying close to the lowest price BCP's shares have traded at and less than 0.22 times net assets

Source: Bloomberg

There's an extra flavor of victory for Fosun in this deal, too. Last year, the company was one of three bidders turned down by Portuguese regulators in an auction for Novo Banco, the lender that emerged from the restructuring of Banco Espirito Santo SA. At the time, authorities said Fosun, Chinese insurer Anbang Insurance Group Co. and Apollo Global Management LLC had all failed to offer enough. 

This time, it seems regulators aren't concerned about Fosun's lowball price as long as BCP's equity is replenished. One might think such a bargain would have attracted other takers, but perhaps the growing bad loans in BCP's books were too scary.

Portuguese Mess

BCP's bad loan ratio has spiked since the European crisis before stabilizing at a high level

Source: Bloomberg

Not to Fosun, which is all too familiar with unwilling debtors through its banking investments back home. As for the regulators, sure, they must have had some debate about the financial soundness of the bidder, but ultimately agreed that sometimes it's better the devil you know. It's unclear what the alternative was for BCP, if any, just two years after a major rights offering.

Yet while Fosun comes dressed as a savior, it's no paragon of financial virtue itself. Given the short-term nature of most of its liabilities and the sheer amount of them, the chances that something could go wrong are significant. The group already had a scare in December last year, when Guo was reportedly held by authorities to assist in a probe. He returned to the helm but has since been shier about his expansion plans. 

Fosun's borrowing lines don't look to have been affected by Guo's temporary absence. But in China, it's hard to predict when a knock-on-the-door will become a knockdown. If something were to happen to Fosun after the acquisition, Portugal's biggest lender and one of its biggest insurers would both be simultaneously at risk. It hardly sounds like Portuguese depositors are safer now than before.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at clangner@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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