HNA Group: the Chinese giant sinking in debt

published 3 February 2018

What is HNA Group?

HNA is a Chinese conglomerate that has hit the headlines because of its overseas dealmaking. Hailing from the tropical island of Hainan, the group started out as a regional airline operator, Hainan Airlines, with a single plane in 1993. The business attracted early investment from billionaire George Soros. It is now China's fourth-biggest airline, and has branched out into everything from financial services to hotels, with an estimated $180bn in assets worldwide. An aggressive $40bn overseas expansion drive began in 2016, but has recently run out of steam, with analysts questioning the group's debt-fuelled growth strategy.

What does HNA own?

A whole raft of apparently unrelated businesses. It is the top shareholder in Deutsche Bank (with a 9.9% stake), and owns 25% of the holding company of Hilton Hotels. In 2015 it paid $2.8bn for airport luggage-handler Swissport, and bought premium real estate in Hong Kong, New York and Sydney. More recently it has been trying to buy SkyBridge Capital, a hedge fund founded by Anthony Scaramucci (briefly the director of communications for president Donald Trump last summer). The buying spree has left HNA with a sprawling structure that includes 16 listed subsidiaries, making it hard for creditors to keep track.

What is the problem?

HNA funded much of its growth with debt its current net debt stands at about RMB434bn (£48.8bn). Such leveraged expansion is not uncommon in Asia, where firms often build scale to increase their political and commercial clout. However, HNA seems to have reached the limits of this strategy. Three lenders have reportedly frozen credit lines to some of its units following missed payments, while the group has been paying interest rates as high as 11%-12% to secure short-term funding (comparable Chinese borrowers usually only pay 7.5% for such financing). Trading in the shares of seven HNA subsidiaries has now been suspended as the group plans a "wide-ranging" asset restructuring.

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Why is it in trouble now?

HNA's debt binge may be catching up with it, but the conglomerate still has plenty of valuable international assets. What really seems to have changed is the political weather. Chinese authorities have been cracking down on capital outflows since the end of 2016, with real-estate conglomerate Dalian Wanda and Anbang Insurance forced to scale down their international ambitions. At first HNA seemed to have escaped the regulatory dragnet, but was then "swept up in a factional tussle" ahead of October's Communist party congress, says Lucy Hornby in the Financial Times, amid rumours the group has ties to senior party officials.

Who owns HNA?

We don't know for sure. HNA sought to quash the speculation last July by disclosing that two charities own 52% of the conglomerate, with 12 of its executives holding most of the rest. However, the charitable organisations merely create another level of opacity about who ultimately calls the shots, and this is not doing HNA any favours with foreign regulators. Authorities in at least six countries, including Germany, Switzerland and the US, are examining its deals, and New Zealand's Overseas Investment Office blocked its attempted acquisition of a local finance business last December.

What is HNA doing about the issue?

It's selling assets to help with its liquidity problems. It sold an office building in Sydney for $166m last week and also announced plans to float Swissport, which it hopes will net it $2.87bn.One of the firm's Chinese units also plans to sell new shares on the Shenzhen stock exchange, although Bloomberg Gadfly's David Fickling notes that "without a neat initial public offering narrative to sell to investors, it looks more like a bailout". Nevertheless, "a well-managed garage sale could be just enough to keep this show on the road".

Can it do anything else?

In the medium term, HNA's best bet may be to insinuate itself back into the Chinese government's good books. Indeed, the firm hasn't stopped buying overseas assets: it completed a $1bn takeover of Singaporean logistics business CWT at the end of last year. With President Xi Jinping pushing the "Belt and Road" mega-project along the old silk road, HNA may just shift its acquisitive focus to infrastructure. The South China Morning Post's Elaine Chan says that the Singaporean deal, as well as the $775m purchase of a stake in commodity trader Glencore's petroleum storage unit last year, mark a "strategy switch by HNA to ditch its trophy assets for projects that align with the Chinese government's strategic interests".