Banking & Finance

Buyers remorse

Another lapsed acquisition points to HNA Group’s ongoing liquidity woes

HNA-w

Like it’s logo, it’s in the red

“Be honest and straightforward.” It is one of the pledges every new employee has to sign up to when they join Value Partners, an asset manager listed in Hong Kong.

What, wonders WiC, would those employees have made of that pledge if an attempt of the company’s founders to sell a stake to HNA Group hadn’t fallen through last week? For straightforward is not a word which has recently been associated with the acquisitive, debt-laden and mysterious Chinese conglomerate.

HNA’s secretive shareholder structure was recently sanctioned in November by Swiss regulators, which fined the group $51,000 for providing “untrue” information during the takeover of air services company, Gateway Group. A few weeks later, German authorities also joined the fray, launching a formal investigation into HNA’s purchase of a 9.9% stake in Deutsche Bank.

There has been ongoing speculation about HNA’s links to China’s former anti-corruption chief, Wang Qishan, most notably in the Financial Times (the company has consistently denied them). Wang left the Politburo last October and all eyes are now trained on the annual gathering of Chinese legislators in March to see if Wang is to be given a new role in the Chinese government.

One thing that is more certain is HNA’s long list of bank creditors. These comprise pretty much all the great and the good of the state-owned banking sector. Given China is a country where the government has an active role determining the fortunes of individual companies, its major banks’ attitude to HNA will be key to whether it is able to overcome its current liquidity issues.

According to a report on investment platform, FSMOne, HNA has Rmb185.2 billion ($28.52 billion) of debt maturing in 2018 thanks to a $50 billion acquisition spree over the last two years. This spending binge has been unravelling at the seams since the middle of last year when the government asked banks to give its financials a “health check”, with the Value Partners deal being just the latest casualty.

In mid-December, HNA tried to reassure the market that it had Rmb300 billion available. Yet as FSMOne points out, HNA appears not to have tapped those credit lines, but carried on relying on “ultra short-term debt” to deal with immediate maturities instead. In the month to mid-December, Reuters reports that HNA group entities raised Rmb5 billion via this route in the domestic market on an average interest rate of 7%.

Bloomberg suggests HNA had no option because some of its banks have been freezing unused credit lines, adding that HNA has already missed several interest and principal repayments in recent weeks.

FSMOne concludes that unless HNA “can issue long-term bonds, or draw up a concrete funding plan with its major banks,” its future prospects remain highly uncertain.

This pessimism is certainly borne out by warning signs in the bond market. In November, for instance, one HNA unit sold $300 million of one-year paper but the issuance came with an extremely expensive coupon of 8.875%. On December 9, this bond promptly collapsed eight points to 90 cents on the dollar when China Citic Bank issued a statement saying HNA Group was “experiencing temporary liquidity difficulties” repaying a commercial acceptance bill pledged by Hainan Airlines. Since then, the bond has rebounded five points after HNA said it had met its creditors and bought some of its bonds back.

Meanwhile one of HNA’s major purchases of 2017 is being rejigged thanks to growing US security concerns about Chinese M&A purchases (see this week’s “M&A” section). HNA agreed to buy 51% of Glencore’s oil products storage business in March, but the US assets will no longer be part of the deal unless the Swiss-based commodity trader receives “satisfactory” clearance to sell them from Washington. One upside: for cash-strapped HNA this reduces the purchase price by 25% to $579 million.


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