Stalled deal

Will its IPO take off?

A year after the carrier Swissair filed for bankruptcy in 2001 it sold its profitable inflight catering business Gategroup and ground-handler Swissport as part of the liquidation. The airline probably didn’t expect both these assets would end up in the hands of the same Chinese buyer – or that the future owner would again need to offload them due to its own financial turbulence.

Hainan-based HNA Group, which morphed from a regional airline to an “everything” conglomerate through a slew of acquisitions, has been hawking the Swiss aviation assets it gobbled up less than two years ago. The goal is to plug a $2.4 billion funding gap owing to debts that need repaying by the end of June (additionally $20 billion of short-term liabilities come due over the next couple of years too).

To widespread surprise, however, HNA announced on March 26 that it would not pursue the listing of Gategroup on the SIX Swiss Exchange just hours before trading was due to start. It explained that the cancellation was “due to a gap in valuation under current market conditions”. By floating 65% of Gategroup, HNA was looking to raise between $917 million and $1.4 billion from a company it took private for about SFr1.4 billion ($1.45 billion) in 2016. It also planned to distribute an unspecified amount of shares to investors outside Switzerland.

“The view of many investors – that HNA had to do the flotation at any price – was wrong,” a source told Reuters, who added that there would have been enough buying demand if the price range was slightly lower. “Demand from private banking clients was weaker than anticipated and investors had become more cautious,” said the source close to the IPO process.

Although Gategroup represents a tiny portion of HNA’s assets – which totalled $190 billion as of June 2017 – its aborted sale has cast a cloud over another IPO that HNA is lining up.

Swissport, which HNA paid Swf2.73 billion for in early 2016, is planning to list in Zurich too – also at a valuation that would cover HNA’s acquisition costs, the South China Morning Post reported.

“Preparations are well on track with regards to the milestones of our IPO schedule and feedback from potential investors has been very positive,” the Opfikon-based aviation service group said after the Gategroup transaction fell through.

But Swissport’s relisting could be trickier as its financial entanglements with HNA are more intricate. “Gategroup has a much cleaner structure and is significantly lower leveraged than Swissport,” a bond investor told the Financial Times.

On March 6 Moody’s slashed Swissport’s outlook to “negative” from “stable,” and downgraded the majority of its debt by a notch. The credit rating agency said it had qualms over “the timely repayment in May 2018 of the loan provided to an affiliate of HNA” and that Swissport “sustained negative free cashflow generation in 2016 and 2017”.

Swissport offered financing to HNA twice last year, including a €400 million 90-day loan. The borrowing worried a lot of investors, especially after Swissport triggered a technical default earlier last year when HNA used pledges over shares in Swissport to finance the acquisition before the deal actually closed.

Beyond the primary market, HNA’s $16 billion yard sale seems to be going better. It has so far disposed of $6.7 billion in equity stakes and prime real estate. These include three plots of land at Hong Kong’s former Kai Tak airport site, a 25% stake in Hilton’s timeshare spinoff, and a collection of property and logistics units to Tianjin-based developer Sunac China. Importanly it has managed to divest most of its assets above their original purchase costs, according to Bloomberg. (The trimming of its stake in Deutsche Bank and the unloading of New York-listed shipping company Dorian were not thought to have been profitable, though.) Next on the sales agenda: some or all of its Hilton stake, an office tower in San Francisco, some logistics assets in Singapore, and some of its sprawling interests in Haikou’s business district.

The company said in a filing in China that its total outstanding debts reached Rmb637 billion by the end of November 2017. That suggests HNA’s corporate finance activities will continue to make headlines for some months to come.

Keeping track, Apr 13, 2018: We mentioned last week that HNA’s failure to take Zurich-based inflight caterer Gategroup public boded ill for other share sales in its pipeline. And on April 10, another subsidiary of the Hainan-based company, Swissport, said that it “will defer the planned Initial Public Offering and listing of its shares on the SIX Swiss Exchange due to current market conditions.”

The airport services handler was looking to secure a valuation of at least SFr2.7 billion ($2.83 billion) – roughly what HNA paid for it in 2016 – by this summer. However, there is a chasm between HNA and interested parties on Swissport’s worth, according to Reuters. Media reports also suggest that Temasek might purchase the two Swiss assets

The stalled IPO marks HNA’s third failed flotation this year, including a S$775 million ($561.2 million) commercial REIT IPO in Singapore. Capitalising on a portfolio of assets in Australia, the UK and Singapore, the REIT deal was “progressing very slowly,” according to HNA Investment Group in January. Meanwhile, the cash-strapped company has announced a plan to sell 63 million shares in Hilton, or 76% of what it owns, in a secondary offering through a subsidiary called HNA Tourism. This is despite the US hotelier raising its first-quarter earnings forecast lately.

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