Payback time

To solve its liquidity woes HNA is selling assets


Shedding its excess baggage

“It only takes 10 seconds to crush a man’s ambition” is one of the most famous quotes from House of Cards, the US television drama that counts China’s former anti-graft tsar Wang Qishan as a fan.

It is also an apt line to describe the rise, fall and possible metamorphosis of the airline-turned-global conglomerate, HNA Group. Except that instead of 10 seconds, it has taken HNA just over a year to shed about two-thirds of the assets Beijing has compelled it to divest in order to bring it to heel.

As with House of Cards – whose protagonist Frank Underwood will be killed off in scenes set to air this autumn – HNA has also lost one of its principals recently. The company’s co-founder, Wang Jian, died unexpectedly this summer when he fell off a wall in the south of France.

For HNA, that leaves co-founder Chen Feng in charge and over the past few months, he has promoted key family members within the group including his son, Daniel Chen Xiaofeng to deputy CEO and nephew, Dennis Chen Chao to CIO.

As the Financial Times reported in 2017, Chen has long been associated with Wang Qishan after working for him at the China Agricultural Development Trust in the 1980s.

Last month Chen said the group was returning to its roots to ensure its “healthy development” after the government called an abrupt halt to its $50 billion, two-year spending spree in the summer of 2017.

However, investors are yet to be convinced that HNA has overcome a liquidity crunch despite selling about Rmb137 billion ($20 billion) in assets over the past year, according to the Wall Street Journal’s calculations.

On the positive side, HNA appears to be reducing debt faster than assets. Its latest financials reveal a 7.4% reduction in assets during the first half of 2018 (Rmb1.231 trillion to Rmb1.14 trillion) compared to a 10.7% reduction in total debt (Rmb736.5 billion to Rmb657 billion).

However, according to Reuters, HNA’s debt-to-Ebitda ratio stood at an eye-watering 21.36 times in June. This figure is higher than the level S&P Capital IQ reported for the end of 2017 of 13 times. If both numbers are accurate, it suggests the liquidity situation is worsening not improving. Certainly, HNA’s bond yields bear testament to that scenario.

The group has $550 million of foreign-currency debt falling due within the next few months including a $300 million, 8.875%, one-year bond HNA issued in November 2017. Today it is trading with a return of 32% – a highly distressed yield.

Over the past month, HNA has defaulted on two principal payments: an Rmb1 billion 270-day issue by subsidiary Haikou Meilan in August (it attributed this to a technical glitch) and an Rmb300 million loan that HNA Innovation owed to Hunan Trust. Last week, the latter also said that the loan’s guarantor, HNA Tourism, had failed to stand by its obligations.

One of investors’ chief difficulties with HNA involve untangling the group’s complex finances given that the parent is linked to 10 companies listed on the mainland, five in Hong Kong and has hundreds of subsidiaries.

According to the Wall Street Journal, HNA has a further $10 billion of assets on the block including IT parts supplier, Ingram Micro which it purchased for $6 billion in 2016, plus its remaining 7.6% stake in Deutsche Bank, currently worth about $1.8 billion.

The Global Times reports that HNA has actually made a profit on some of the assets despite their quick-fire sale. This includes its stake in the Hilton Hotel group, which it purchased for $6.5 billion in 2016 and sold for an additional $2 billion earlier this year.

However, other sales do not look so fruitful. Take Irish aircraft leasing company, Avolon. HNA purchased it for $2.5 billion in 2015 and sold a 30% stake to Japan’s Orix this August for $2.2 billion. So far so good, except that Avolon took over US leasing company CIT for $10 billion in 2016.

Overseeing all the sales is a special team from China Development Bank, which has been stationed at HNA’s headquarters in Haikou the Wall Street Journal says.

And in yet another sign of HNA’s clipped ambitions news broke last week that it had vacated the eight floors it was leasing in Hong Kong – again to save money.

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