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China Nears Takeover of HNA Group as Virus Hits Business


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China plans to take over indebted conglomerate HNA Group Co. and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from the deadly coronavirus outbreak. HNA-related shares rose.

The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations, according to people familiar with the plans. The once little-known airline operator shot to prominence between 2016 and 2017 after a debt-fueled acquisition spree saw it become the leading shareholder of iconic companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, while paying top dollar for properties from Manhattan to Hong Kong.

China is under growing strain from the shutdowns imposed to curb the coronavirus, which has killed more than 2,000 people. As President Xi Jinping seeks to prevent the short-term economic pain from turning into a slump that outlasts the contagion, his government is considering direct cash infusions or mergers to stabilize the hobbled airline industry, while the People’s Bank of China said it will work on supporting domestic consumption. A takeover of a high-profile company like HNA would take those efforts to a new level.

HNA Has $35.6 Billion Debt and Avolon Guarantees $14.4 Billion

An announcement could be made as soon as Thursday, though talks could drag on or fall apart, the people said, asking not to be identified as the discussions are confidential. Under the emerging plan, China would sell the bulk of HNA’s airline assets to the country’s three biggest carriers -- Air China Ltd., China Southern Airlines Co. and China Eastern Airlines Corp., according to the people. HNA-backed Suparna Airlines is also likely to be unloaded to the Jiangsu provincial government, the people said. Discussions with the airlines are continuing, they said.

A representative for HNA declined to comment. Calls and messages to Hainan government officials and press officers at the three state-run airlines weren’t returned. Suparna representatives weren’t reachable and the Jiangsu provincial government didn’t immediately respond to an emailed query.

HNA has been slimming down after a $40 billion buying binge left it with one of the highest levels of corporate debt in China. In the past year, the group has been returning to its aviation roots, culminating in a November announcement to divide its businesses into airlines, aviation leasing and airports, with the rest being lumped under its “non-aviation asset management” unit. But its focus on aviation and tourism backfired as the virus epidemic led to an unprecedented drop in flights in and out of China.

“HNA is, even by Chinese standards, a sprawling and indebted conglomerate, and the collapse in Chinese airline activity due to the outbreak of Covid-19 has apparently pushed it to effective bankruptcy,” London-based Agency Partners analysts led by Nick Cunningham wrote in a note after Bloomberg’s report.

HNA has for years been struggling with debts that once climbed to almost 600 billion yuan ($86 billion) as well as soaring borrowing costs. While its total debt fell to 525.6 billion yuan as of mid-2019, its cash pile shrank at a much faster pace, to 50.4 billion yuan, the smallest amount based on semiannual figures stretching back to 2015. Chairman Chen Feng closed 2019 by predicting that this year would be “the decisive year to win the war” against the conglomerate’s long-running liquidity challenges.

In an attempt to stabilize the financial situation, HNA has been looking to divest assets including plane lessor Avolon Holdings Ltd., which is worth about $8.5 billion, as well as Swiss aircraft-maintenance firm SR Technics and container-leasing business Seaco, people familiar with the matter have said.

China’s economy was likely running at just 40%-50% capacity last week, according to a Bloomberg Economics report, after efforts to contain the epidemic closed stores, brought factories to a halt and triggered a virtual shutdown of the airline industry. Employers have encouraged people to stay home, shopping malls and restaurants are empty, and amusement parks and theaters are closed.

The impact on business has been spreading around the world, disrupting supply chains of the world’s largest carmakers and hitting sales at companies from Apple Inc. to Burberry Group Plc and Nike Inc. Apple this week said it doesn’t expect to meet its revenue outlook this quarter, joining the growing number of global corporations that either warned about a financial hit or scrapped their forecasts altogether.

— With assistance by Haze Fan, Steven Yang, Vinicy Chan, Heng Xie, Dong Cao, Manuel Baigorri, Cecile Daurat, Siddharth Vikram Philip, Sree Vidya Bhaktavatsalam, Emma Dong, Zheng Li, and Ying Tian

(Updates with reference to market reaction in first and eighth paragraphs, reference to Suparna deal in fourth paragraph,)


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E o HNA Group pediu água, além disso Pequim acredita que há companhia demais no país:

HNA seeks help from Hainan government as coronavirus outbreak imperils highly leveraged group’s debt workout

  • A working committee led by the Hainan government, comprising representatives of the civil aviation administrator and China Development Bank, will take over the management of risks at HNA, the company said
  • The committee will be led by Gu Gang, who also heads the provincial authority’s development unit, HNA said.

Yujing Liu and Peggy Sito
Published: 4:46pm, 29 Feb, 2020

HNA Group, one of the biggest asset acquirers to emerge from China in the past decade, has sought the help of the Hainan provincial authorities to manage its liquidity, as the country’s coronavirus outbreak deterred travelling and imperilled the company’s debt workout plan.

HNA’s liquidity will be managed by a working committee comprising representatives from the Hainan government units, the country’s civil aviation administrator and China Development Bank, according to the company’s statement released on Saturday.

The board of directors of the Haikou-based conglomerate was reconstituted to make way for two new members. Gu Gang, chairman of state-owned Hainan Development Holdings, was appointed executive chairman of HNA, while Ren Qinghua, director of the Hainan Yangpu Economic Development Zone, was appointed co-chief executive. Co-founder Chen Feng would stay on as chairman, while Adam Tan Xiangdong continues as chief executive alongside Ren, HNA said.

The weekend reshuffle comes as HNA Group, which owns Hainan Airlines and Hong Kong Airlines among its myriad assets from aviation to hotels, banking and real estate, has come under intense pressure to repay debt that ran to US$108 billion at its 2018 peak. The Haikou-based conglomerate, more than a year into an assets disposal programme, said its debt impairment plan has been imperilled by “increasing liquidity risk” because of the current coronavirus outbreak.

HNA Group grew out of Hainan Airlines, which began in 1989 as a regional carrier flying between the provincial capital of Haikou and mainland China. The airline operates a fleet of 660 planes in two carrier units and aircraft leasing company serving more than 1,400 routes.

The airline grew quickly, counting US financier George Soros as its biggest global shareholder at one stage, enabling the HNA Group to be established in 2000 around the aviation assets, which by that time had absorbed Shanxi Airlines, Air Changan and China Xinhua Airlines in the first phase of a state-led consolidation plan. In 2006, the HNA Group established Hong Kong Airlines.

From its core aviation business, HNA quickly expanded and went on a global shopping spree that added a range of companies and brands to its portfolio, from golf courses and a stake in Deutsche Bank to Manhattan office towers and waterfront land parcels in Hong Kong.

Concerned about the impact of private sector debt on China’s banking system, regulators in 2017 arm-twisted HNA and a handful of the country’s biggest asset acquirers – Anbang Group, Dalian Wanda Group, and Fosun Group – to stop their debt-fuelled shopping spree and pare back their loans. HNA reversed its acquisitions since, selling a string of assets.

From its core aviation business, HNA quickly expanded and went on a global shopping spree that added a range of companies and brands to its portfolio, from golf courses and a stake in Deutsche Bank to Manhattan office towers and waterfront land parcels in Hong Kong.

Concerned about the impact of private sector debt on China’s banking system, regulators in 2017 arm-twisted HNA and a handful of the country’s biggest asset acquirers – Anbang Group, Dalian Wanda Group, and Fosun Group – to stop their debt-fuelled shopping spree and pare back their loans. HNA reversed its acquisitions since, selling a string of assets.

By June last year, total debt at HNA had fallen by 30 per cent to 525.6 billion yuan (US$75 billion). Still, the airline had more assets to sell, with a net loss of 1.08 billion yuan in the first-half of 2019, its second consecutive interim deficit.

Operating profit, which strips out some non-cash expenses, fell 11 per cent to 11.8 billion yuan – the lowest since the end of 2016. While long-term borrowings fell to the lowest level since December 2016, short-term debt rose 9.7 per cent to 187.1 billion yuan.

That makes HNA Group more dependent on Hainan Airlines, China’s biggest non-state carrier by fleet which once counted American financier George Soros as a major shareholder, as the biggest income earner for the group.

The airline was expected to play a pivotal role in helping the HNA Group chart a course back to profitability. Third-quarter revenue at the carrier rose 10 per cent to 21.44 billion yuan according to its latest available financial results, making it the biggest quarterly turnover since 2009.

The coronavirus outbreak, which coincided with the 2020 Lunar New Year holiday, forced an estimated 50 million people to be homebound under quarantine, and caused travelling to plunge by 75 per cent compared with last year. That would slash the capacity of Chinese airlines by 80 per cent over the past month, said Jefferies analysts led by Andrew Lee in a report last week.

“Although the company blames the coronavirus outbreak, HNA’s troubles really resulted from years of unproductive deals fuelled by unsustainable borrowings,” said Brock Silvers, managing director at Adamas Asset Management. Other airlines are circling HNA’s aviation assets, and the company seems unlikely to survive in its current form, he said.

Amid the general slump in the aviation industry, Hainan Airlines stands out because of the debt level of its parent company.

“The Chinese government generally worry more about labour-intensive industries like aviation, which serve a massive number of customers and has a lot of liabilities owed to individuals,” said Ron Thompson, managing director at A&M in Hong Kong, who heads the firm’s Asia restructuring practise.

Regulators would want to take action to stabilise the situation by properly handling HNA’s liquidity problem, and prevent the public from panicking over their booked tickets with the airline, he said

Under a government plan, Hainan Airlines’ assets may be split with other Chinese state-owned carriers, according to a February 20 report by Bloomberg, citing people familiar with the matter.

Today’s statement did not mention the treatment of HNA’s aviation assets, although the working committee handling the group’s risk management includes Li Shuanchen, a deputy at the civil aviation administrator’s southern region.

“I think it’s an indication that the government has started a possible takeover or a restructuring effort,” said Gao Feng Advisory chief executive Edward Tse, a former corporate adviser to HNA Group.

He expects HNA to see more assets sale and start the restructuring of its aviation business.

China’s aviation industry has taken a heavy hit since the Covid-19 outbreak erupted in January, as authorities imposed lockdown on more than a dozen cities and advised residents to stay at home.

The first indication that another round of consolidation in China’s industry may be underway came on February 13, when the spokesman of the Civil Aviation Administration of China (CAAC) Xiong Jie said that the regulator “supports airlines to merge, restructure, and optimise their capacity.”

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