High-flying HNA Group comes back to earth as scrutiny hits dealmaking

China Shun Ke Long Holdings

26/09/2017 06:53

* Chinese crackdown on debt raises red flags globally 
    * Financing costs soaring to pay for acquisitions 
    * Some investment banks shun HNA over opaque leadership 
 
    By Matthew Miller 
    BEIJING, Sept 26 (Reuters) - HNA Group, the high-flying 
Chinese conglomerate caught in the cross-sights of Beijing, has 
hit turbulence as deals stall and scrutiny of its finances and 
shareholding structure intensifies. 
    Beijing's clampdown on highly-leveraged foreign investment 
has led to more regulatory scrutiny around the world, putting 
the brakes on a remarkable period of growth that saw HNA 
announce $50 billion of acquisitions in just over two years. 
    New deals have dried up and investment banks like Goldman 
Sachs and Bank of America Merrill Lynch have grown wary of 
working with the company that has sprawling interests in 
aviation, logistics and tourism. 
    HNA's long-term strategy of debt-fuelled growth, which 
peaked with its purchase of stakes in Hilton Worldwide Holdings 
and Deutsche Bank, is fraying, compounding the company's 
problems as it struggles to allay concerns over its opaque 
shareholding structure. 
    A plan to publicly list Pactera, a Chinese technology 
services company HNA bought last year, was suspended this month 
after Goldman Sachs  GS.N  said the deal failed to meet its 
internal due diligence requirements.  urn:newsml:reuters.com:*:nL4N1LN3BR 
    HNA has defended its health, saying it maintains strong 
working relationships with more than 300 financial institutions 
and has a healthy line of credit. 
    "A lot of the stuff going on in the media is just 
perception, and that perception doesn't accurately reflect our 
business," said Guang Yang, chief investment officer of HNA 
Capital, the company's financial arm. "Our business continues to 
be very strong." 
    HNA bonds have dipped slightly since the extent of Beijing's 
crackdown on debt became clear. Two bonds from HNA Group and 
Hainan Airlines due in 2018, for instance, are being bid at 
under 99 cents on the dollar, versus around 100 in June. 
    Finance costs have soared to 14.19 billion yuan in the first 
half of 2017, from 6.47 billion yuan in the year-earlier period, 
as HNA completed acquisitions and utilized 454.5 billion yuan in 
credit. 
    Shareholder equity now finances 40 percent of 1.21 trillion 
yuan in total assets, with the rest coming from borrowed funds, 
after stakeholders injected 488.5 billion yuan into the company 
last year. 
    Some western bankers say their ability to work with HNA is 
limited by lingering questions about the company's dependence on 
leverage. 
    "International banks are reluctant to do any new business," 
said a senior banker with a European lender, requesting 
anonymity because he was not authorized to speak with the media. 
"The regulatory environment has changed." 
    Brock Silvers, managing director at Kaiyuan Capital in 
Shanghai, said a main concern for Beijing was "whether HNA's 
aggressive financial structure could result in a domino effect 
through its tightly levered and pledged portfolio, putting 
Chinese investors and bank capital at risk." 
    HNA investments controlled by unlisted domestic subsidiaries 
with little track record and lacking offshore regulatory 
oversight are a particular concern, bankers say. 
    "Nobody really knows how much leverage they have," said 
Andrew Collier, managing director at Orient Capital Research in 
Hong Kong. "They use all of these off-balance sheet companies to 
raise a lot of capital." 
     Another concern for regulators and bankers is the company's 
opaque shareholder structure.  
    Last week, the Swiss Takeover Board asked HNA to clarify its 
ownership by Oct. 3 given apparent changes since its $1.5 
billion takeover last year of the aviation services company 
Gategroup. 
    HNA announced in July that a New York-based foundation 
controlled by HNA management would act as its largest 
stakeholder. But the move raised questions about individuals who 
had been holding the shares previously and their role at HNA. 
    Under the restructured shareholding, a dozen senior 
executives - led by the founding chairmen Chen Feng and Wang 
Jian - hold a combined 47.5 percent stake in the group, with the 
New York foundation and a China-based charity holding the bulk 
of the rest.  urn:newsml:reuters.com:*:nL3N1KF5BC 
    All this comes as the company is undertaking U.S. government 
reviews for its proposed acquisition of SkyBridge Capital, a 
hedge fund platform, from Anthony Scaramucci, and a bigger stake 
in Old Mutual's U.S. asset management unit.  
    HNA abandoned a bid for Global Eagle Entertainment Inc 
 ENT.O , an in-flight services company, after failing to get 
U.S. regulatory approval in July.  urn:newsml:reuters.com:*:nL3N1KH1VD 
         
    DEBT RISKS 
    HNA's debt-fueled strategy peaked this year with the Hilton 
 HLT.N  and Deutsche Bank  DBKGn.DE  deals, and buyouts of the 
U.S. technology provider Ingram Micro and CIT Group's aircraft 
leasing business. 
    HNA Group, which controls 19 listed companies, reported that 
total debt doubled to 717.99 billion yuan at the end of June 
from the end of 2015. Total assets increased 157 percent to 1.21 
trillion yuan. 
    At Bohai Capital Holding Co  000415.SZ , which oversees 
HNA's aviation and container leasing businesses, the 
debt-to-asset ratio reached 87.6 percent, with short-term 
borrowing of about 34 billion yuan, according to its latest 
filing. 
    Moody's Investors Service in September warned that "Bohai's 
high leverage, reliance on short-term financing and high 
debt-funded growth represent a risk." 
    But it also upgraded its ratings for Bohai's Avolon airplane 
leasing unit, expecting the company to "strengthen its financial 
profile," citing, among other things, "slower growth as a result 
of reduced debt-funded acquisitions." 
    
    LEVERAGE STRATEGY 
    HNA's debt-driven growth strategy dates from 2003, when 
Hainan Airlines, the HNA Group flagship that counted George 
Soros as an early investor, was battered by the SARS outbreak. 
    "We came up with the idea, why don't we leverage ourselves," 
HNA's chief executive, Adam Tan, said in April. "We can leverage 
this business" against the "ups and downs" of the airline 
business. 
    The vehicle was HNA Group, which invested in airlines, 
airports, tourism, and real estate in China and around the 
world. 
    Domestic deals have often been backed by guarantees provided 
by other HNA companies. Abroad, the group started using 
cross-border standby letters of credit, backing offshore 
hard-currency debts with onshore cash deposits. 
    More recently, HNA has turned to structured deals like loans 
guaranteed by acquired assets and share pledges, often combined 
with hedging strategies, corporate filings show. 
    HNA secured a $3 billion margin loan, for example, to help 
finance its $6.5 billion Hilton share acquisition, pledging its 
entire shareholding to a consortium of banks. 
    In August, to acquire stakes in Deutsche Bank and Dufry AG 
 DUFN.S , an airport shop operator, HNA used equity margin 
financing, backed by an equity collar, a hedging strategy. 
 urn:newsml:reuters.com:*:nL8N1L358R 
     
    PUSH BACK 
    Amid all the scrutiny, Yang of HNA Capital said the company 
was pressing ahead with some deals. 
    HNA this month took control of Frankfurt-Hahn Airport in 
Germany, a $16 million deal. HNA Holding Group Co  0521.HK  is 
also moving forward with a $1 billion takeover of the 
Singapore-listed logistics company CWT Ltd  CWTD.SI  
 urn:newsml:reuters.com:*:nL4N1LO4GB 
    "The company is in great shape," Tan, the chief executive, 
said in July. "We're going to keep on going." 
 
 (Reporting By Matthew Miller. Umesh Desai contributed 
reporting.; Editing by Philip McClellan) 
 ((matthew.miller1@thomsonreuters.com;)) 
 
Keywords: CHINA CONGLOMERATES/HNA