Here we go again...
On December 8, we lamented how every few days we return to the subject of systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda. We also noted how our chief source of concern had become HNA, after it issued a bond with less than one year to maturity with the extortionately high coupon of 9%. And S&P downgraded HNA’s credit rating from b+ to b, five levels below investment grade. The reason for our continuing focus on HNA is its $28bn of short-term debt which matures before the end of next June, much of it accumulated during a $40 billion binge of acquisition-driven growth which saw it become a major shareholder in Deutsche Bank, Hilton Worldwide and others.
In our update less than two weeks ago, we noted how HNA business units had suffered further credit downgrades and been forced into cancelling bond issues. For example, Hainan Airlines cancelled a 1 billion yuan ($151.2 billion) issue of perpetual bonds to repay maturing debt, HNA Investment Group (hotels and real estate) cancelled a 5.22 billion yuan ($790 million) issue and S&P cut the long-term credit rating of HNA’s Swissport Group Sarl to b-, six levels below investment grade, citing concerns about its parent.
As this spate of bad news travelled across the business media, we noted wryly that.
A sign that a company’s financial position is becoming critical is when company executives make public pronouncements that all is fine without providing the financial data to back up their assertions.
HNA, in our opinion, entered this “zone” after both the Financial Times and Bloomberg reported on interviews they’d had with a newly-appointed HNA board director, Zhao Quan. According to Quan, the company has “healthy” cash flow, “stable” debt structure and there was no liquidity problem. However, he did acknowledge the company was affected by “end-of-the-year tightness” in lending markets.
It’s become clear that HNA’s position is more precarious than Zhao was prepared to acknowledge. Over the weekend, Citic Bank Corp., China’s seventh largest bank, stated that HNA Aviation Group is in difficulty. From Bloomberg.
Citic Bank Corp. said a unit of HNA Group Co. is having difficulty repaying certain short-term debts, just over a week after the Chinese conglomerate said it won’t default in the coming year. HNA Aviation Group Co. has had trouble paying bankers’ acceptances - debt instruments that mature in the short term - and Citic Bank is working with HNA Group to try to resolve the situation, the Chinese lender said in a statement sent exclusively to Bloomberg News this weekend. The group has several bonds and loans from multiple banks maturing at similar times, causing a “temporary liquidity” issue, Citic Bank said.
The statement from Citic Bank comes after HNA Group director Zhao Quan sought to ease investor concerns over the conglomerate’s ability to pay its debt obligations. The company has “a healthy and stable debt structure” and there would be no default in the coming year, he said in a Dec. 8 interview.
Not surprisingly, when Bloomberg asked for an explanation, HNA was ready with an explanation for the current mishap.
HNA Group’s cooperation with Citic Bank remains normal and there’s no delayed payment, the company said in a WeChat response to Bloomberg News questions on Saturday, declining to comment further.
An HNA unit’s dollar bonds due in 2018 dropped 0.4 cent, the first decline in three trading days, to 97.2 cents on the dollar as of 11:20 a.m. Monday in Hong Kong, according to prices compiled by Bloomberg.
While a bond market rout drove up funding costs for all Chinese firms recently, the acquisitive conglomerate has faced its own issues as government scrutiny of its finances this year has made some investors wary. Chief Executive Officer Adam Tan said late November that the company is considering selling assets, suggesting it is reversing a shopping spree that cost tens of billions of dollars.
In another Bloomberg piece from yesterday, “The Mysterious Chinese Company Worrying The World”, authors Laurence Arnold and Prudence Ho noted that although the company is regularly in the news, HNA “remains shrouded in mystery”. Although the focus of investigations is different, HNA is currently being investigated by lawmakers and regulators in the US and Europe, as well as in China, where the authorities are seeking to rein back foreign takeovers which contributed to capital outflows.
In the US, HNA is being investigated by the Committee on Foreign Investment in the United States (CFIUS) due to its proposed purchase of a stake in the hedge fund owned by Anthony Scaramucci, President Trump’s former communications director. It is also being sued for its dealings with bankrupt travel company, Travana. Former Travana executives claim that the company may have significant claims against HNA which, they say, benefited from its closure. In another case, two HNA units are being sued for providing false and improper information to the CFIUS which led to the collapse of a $325m takeover of a technology company. In Europe, the German financial regulator is investigating whether HNA accurately reported its holdings while acquiring its stake in Deutsche Bank.
Meanwhile, putting aside all the lawsuits, scrapped bond issues and credit downgrades, the ownership of HNA, and its potential links to the Chinese authorities, remains opaque. From the Bloomberg article.
HNA disclosed in July that it’s controlled by two company-connected charities named Cihang -- one based in New York, the other in China’s resort island of Hainan -- that together own 52 percent, and that 12 company officials, including founders Chen Feng and Wang Jian, together hold about 47.5 percent. Prior to that, a little-known investor named Guan Jun had been HNA’s biggest shareholder, with a 29 percent stake, according to Chinese corporate filings in late 2016. He was holding it on behalf of the company and its leadership, Bloomberg News reported. HNA reorganized its ownership structure in early 2017 and Guan distributed most of his holdings to five individuals, who then donated the shares to HNA’s Cihang foundation. Guan donated his remaining stake, about 4.4 percent, to the charity as well.
As Bloomberg notes, the ownership issue is still not really settled, for example, why did HNA executives place their shares with Guan in the first place? Then, there’s the unsubstantiated allegations of Chinese billionaire-in-exile, Guo Wengui. Guo, a property developer who allegedly fled China when he discovered he would be detained as part of Xin Jinping’s crackdown on corruption. Guo, he resides in a $68m apartment on New York’s Upper East Side, is a member of Donald Trump’s Mar-a-Lago club. Here is a picture he tweeted of himself with former senior Trump adviser, Steve Bannon.
Guo claims that HNA has secret financial ties to top officials in China’s Communist Party. HNA denied the allegation and is suing him in New York for “defamatory and libelous statements, including that Chinese Communist party officials are undisclosed shareholders in the company.”
Confused?
While almost everything we read about HNA is “shady”, one thing is certain, HNA’s financial position is far from being “stable”, as the company asserts. Indeed, all the evidence points to it becoming more unstable, although its “private” ownership structure makes it even harder to analyse. Despite this, the analysts which Bloomberg spoke to don’t sound too alarmed at this point.
“There is opacity around HNA’s corporate and ownership structure as well as its funding strategies,” Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Asia, said earlier this month. “It’s not clear which of its entities will tap the market and if there are any inter-entity fund flows. The market is certainly demanding a lot of risk premium for its opacity.”
There are concerns over HNA’s ability to pay its debt obligations but the firm’s default probability in the near term is “quite low,” Warut Promboon, managing partner at credit research firm Bondcritic Ltd., said earlier this month, adding that he expects Chinese lenders to support the company.
HNA’s interest expenses more than doubled to a record 15.6 billion yuan ($2.4 billion) in the first half from a year earlier, according to data compiled by Bloomberg. Its short-term debt expanded to 185.2 billion yuan, exceeding its cash-pile. “Financial flexibility is becoming increasingly challenged,” Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., said earlier this month.
We are less sanguine.
We see it as a major “red flag” when fee-hunting banks – Bank of America in July and HSBC earlier this month – warn their bankers not to pitch for new business with a company that’s been on a $40 billion acquisition spree since 2016.