Banking & Finance

Payback time

Liaoning Fangda emerges as an unlikely white knight for HNA’s airline


No stranger to turbulence

The Chinese bond market has been restive lately. Names that were deemed too big or too important to fail such as Founder (a chipmaker backed by Peking University) and Brilliance (the first Chinese car firm to go public in the US) are going through bankruptcy proceedings. And for investors losing sleep over the survival of Evergrande, the most indebted of the real estate developers, the fate of HNA Group could be another yardstick.

Just five years ago the aviation conglomerate was a favourite of the world’s bankers, following a $50 billion M&A spree. But while its preferred partner in dealmaking – Stephen Schwarzman’s Blackstone Group – experienced a rare setback last week (the collapse of its SOHO China buyout, see page 13), HNA has been faring much, much worse.

In February a senior court in Hainan reponded to creditor requests and declared HNA bankrupt. A working group from the provincial government was then created to oversee the debt restructuring process, which included putting HNA’s flagship Hainan Airlines and nine other aviation units up for public tender a month later.

Different contenders were then rumoured as white knights, ranging from the biggest of the state-backed airlines to the tourism unit of Shanghai conglomerate Fosun. However, when Hainan Airlines announced the outcome of the sale process on Monday, there was surprise that the winning bidder is a lesser-known private sector firm Fangda Group.

In a circular, Hainan Airlines said the steel-to-coal conglomerate, which is based in the northeastern province of Liaoning, is expected to become its controlling shareholder. An immediate rally in its share price was underpinned by hopes that the restructuring could salvage some value for shareholders by keeping the listed vehicle afloat.

The fate of HNA’s large group of creditors is still to be resolved. Several thousand entities have filed claims worth at least Rmb350 billion ($54 billion) but a brutal haircut for the carrier’s debt looks inevitable, with local media anticipating a lengthy legal battle to follow.

In a WeChat post, Gu Gang, head of the rescue team, said the restructuring effort was approaching its “last sprint”. Executives would work hard to communicate with creditors, he promised, even if it meant they were “scolded and beaten up” by angry investors.

Fangda was founded in 2000 by Fang Wei, a Liaoning native. He has proved an expert bottom-fisher for distressed state enterprises. In 2002 he acquired a state-owned carbon fibre plant for close to nothing, which has since become Fangda Carbon, a Shanghai-listed firm with a market value of over Rm45 billion. Success like this helps to explain his nickname of the ‘SOE asset catcher’, says the Jiemian news website.

Fangda broadened out into steel making, pharmaceuticals and finance. But in 2014 Beijing News reported that Fang was sacked as a representative to the National People’s Congress (NPC), China’s top legislative body, because of a more problematic acquisition of a state-owned steel plant in Jiangxi. He got a bad press again two years later, the South China Morning Post reported, when he was linked to a vote-buying scandal which saw the expulsion of 45 lawmakers from the NPC’s Liaoning branch (see WiC340).

Fang maintained a low profile for a while, returning to the spotlight two months ago when his company donated Rmb200 million to flood relief efforts in Henan. According to Jiemian, Fang has also advised his staff that he sees himself as a custodian at Fangda and that he will gift the company back to “the country and the Party” when he retires.

Analysts say that Hainan Airlines is one of the best assets in the HNA stable, with a number of parties showing interest. The news that a deal had been done didn’t disclose how the airline had been valued, however.

HNA says it will be holding another round of meetings with creditors at the end of this month.

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