“For over a hundred years, when did the Chinese have the power to decide anything?” Chen Feng asked an audience at Harvard five years ago (see WiC346). “Now, finally, I have the opportunity to decide.”
As the founder of HNA Group, Chen was then leading the charge on a frantic round of investment in hotels, airlines and airports around the world. The goal was to bulk up in global travel, building on the foundations of HNA’s original business: Hainan Airlines.
That dream has died a final death over the last few days, after a lengthy investigation by a government-appointed team into HNA’s finances. The repercussions are now being felt across the HNA empire as creditors force the issue by asking the courts to begin bankruptcy proceedings against the parent firm in Hainan. That has triggered similar action at more than 50 of its units, the domestic press reports.
Three of the first to break cover were listed affiliates Hainan Airlines Holding, HNA Infrastructure Investment Group and CCOOP Group, which have acknowledged financial irregularities to shareholders. The reports are that at least Rmb61.5 billion ($9.6 billion) was embezzled by (unidentified) “shareholders and other parties”, while another Rmb46.5 billion in loans was improperly guaranteed to other HNA businesses.
Critics had wondered how HNA was funding its spending spree and they queried some of the biggest buys, such as the purchase of the electronics distributor Ingram or the 15% stake that HNA bought in Deutsche Bank (see WiC362). The takeover trail then went cold in 2017 as the government called a halt on the most dramatic of the overseas spending from similarly leveraged companies including Anbang Insurance, oil giant CEFC and property player Wanda.
The breadth of HNA’s business empire was celebrated as one of its strengths, alongside its links to Hainan’s provincial government and the reputation of Hainan Airlines, the fourth biggest Chinese carrier. Hainan Airlines has now lost its lustre as the flagship firm, laid low by the Covid-constrained travel sector (see WiC485). It is forecasting losses of up to Rmb65 billion for 2020, although what’s more revealing is that most of the red ink is being blamed on impairments on dealings between the airline and other HNA affiliates.
There were more than 2,300 firms under the parent’s control at its peak, reckons Caixin, a business magazine, and as many as 500 of them are going to be included in the bankruptcy process.
The scale of the unravelling can only prompt questions on how companies like HNA and Anbang were able to borrow so much money in the first place and spend it in such an unfocused way. The impact reaches out across the wider financial sector: China Development Bank – the country’s leading policy lender – is said to be HNA’s largest creditor, while state-owned bad loan manager Huarong is another of the claimants in the bankruptcy proceedings (its former boss was executed for gross corruption last week; see WiC526).
“How come such a good conglomerate could turn into something like this today,” Gu Gang, the head of the restructuring team, asked HNA employees last week in a letter, describing some of the previous spending as “one huge bottomless pit after another”.
However, the bankruptcy process should allow HNA to avoid a total collapse. It has claimed profits on the sales of some of the better businesses it acquired during the takeover boom and the mission now is to return to its airline roots by selling more of the non-aviation assets through a trust. A state-backed entity will invest in what’s left of HNA, the press reports, with creditors getting the chance to swap debt into equity in the new company or receive stakes in the trust divesting the other assets.
There’s no place in the new business for Chen Feng, HNA’s former kingpin, who is now professionally disgraced. There were reports last year that he was on a government debtor list that prevented him from staying in luxury hotels and Chen was finally dropped from HNA’s Communist Party committee last month in another signal that a restart is imminent, the South China Morning Post said.
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