HNA’s Hong Kong spat is a sign of worse to come

CWT International

09/05/2019 03:39

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Christopher Beddor
    HONG KONG, May 9 (Reuters Breakingviews) - HNA Group’s Hong
Kong quagmire could worsen its asset selloff. The Chinese
conglomerate is at the centre of a gory boardroom brawl at
struggling Hong Kong Airlines. The episode is unlikely to
reassure anxious bondholders, or government creditors like China
Development Bank.
    The airlines-to-finance conglomerate cut its stake in the
Hong Kong carrier in 2017, and now holds less than 30 percent.
Now major stakeholders allege that cash-strapped HNA siphoned
money from it, a charge HNA has denied. The dispute has set off
a bizarre leadership squabble, leading to confusion about who is
actually in charge. 
    Hong Kong Airlines shareholders were told last month that
having lost about HK$3 billion ($382 million) in 2018, the
company would need to raise HK$2 billion to retain its operating
license, Reuters reported. Suspicious stakeholders demanded to
review the accounts, including dealings with HNA-backed
entities. 
    Zhong Guosong, a former director and current shareholder,
argued that they shouldn’t stump up capital if it risked being
sucked out of the company. One group of shareholders said last
month Zhong had been appointed chairman at an extraordinary
meeting, a claim Hou Wei – still described as chairman on the
company’s website - rejects. The factions, then locked in an
argument over share ownership, have gone to court. On May 8 the
South China Morning Post reported the airline’s auditor quit. 
    Investors were already stressed. CWT International, an
HNA-backed investment holding company, said last month that it
had failed to repay debt, prompting lenders to grab assets in
China and the United States. Now the Hong Kong carrier’s
perpetual bonds have fallen to around 80 cents on the dollar,
according to Refinitiv data.
    The risk is that this particularly ugly public episode
worries would-be buyers of the firm’s other stakes, which range
from technology companies to properties. That might make it
harder for HNA to get good prices for assets to pay down debt.
The company’s biggest creditor, the state-owned policy lender
China Development Bank, was reported last year to have
dispatched a working group to the conglomerate’s headquarters in
Hainan to oversee asset sales. They may be calling some of the
shots, which means Beijing could ultimately end up paying HNA’s
bills. That might not be much comfort to Hong Kong Airlines,
however.
    On Twitter https://twitter.com/cbeddor
    
    CONTEXT NEWS
    - Shareholders in Hong Kong Airlines were told on April 1
that the carrier had lost HK$3 billion ($382 million) in 2018
and would need at least HK$2 billion in new funding or it would
risk losing its operating license, Reuters reported exclusively
on April 12. 
    - Former director and current shareholder Zhong Guosong,
together with Frontier Investment Partner, said via a
spokesperson that they had launched an investigation into “the
embezzlement of HKA assets and serious financial
misappropriation by HNA Group parties”, Reuters reported. The
two parties claim to control a combined 61 percent of shares in
the airline, and say Zhong was made chairman after an
extraordinary shareholder meeting, a claim others dispute. There
is a legal case involving allegations that Frontier Investment
Partner had transferred its stake to another party.
    -  For previous columns by the author, Reuters customers can
click on  BEDDOR/ 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Battle for Hong Kong Airlines pulls complex HNA holdings into
daylight     urn:newsml:reuters.com:*:nL5N22505L
BREAKINGVIEWS -  Cathay’s budget-airline deal may add HNA
surcharge     urn:newsml:reuters.com:*:nL3N21F06S
BREAKINGVIEWS- Blackstone’s round trip brightens HNA attractions
    urn:newsml:reuters.com:*:nL3N20Y18T
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 (Editing by Pete Sweeney and Sharon Lam)
 ((christopher.beddor@thomsonreuters.com; Reuters Messaging:
christopher.beddor.thomsonreuters.com@reuters.net))