China takes charge of HNA, paving way for faster asset sales

China began assuming control of debt-laden HNA Group Co., paving the way for a hastened selloff of the once-sprawling conglomerate’s remaining assets after it became one of the biggest corporate casualties of the coronavirus outbreak. HNA-related shares rose.

Saturday’s announcement that the Hainan provincial government appointed new leaders atop HNA and is assuming management of its liquidity risks is tantamount to China declaring it’s taking over decision making at the group, according to people familiar with the matter, who asked not to be named discussing private deliberations. State authorities will now go through HNA’s books to figure out how to sell off the group’s assets and pay off debt, they said.

Though it’s been under financial strain since late 2017, HNA’s main travel business was decimated by the virus epidemic, leading Chinese authorities to conclude that the Hainan-based group wouldn’t be able to avert collapse without state intervention, the people said.

The rescue of the fallen giant—once the top shareholder of Hilton Worldwide Holdings Inc. and Deutsche Bank AG—will probably soothe investor concerns about the group’s ability to repay debts of about $75 billion. The move marks one of the government’s biggest steps yet to contain the business fallout from a virus that’s killed thousands and is threatening the global economy.

“This is great news for bondholders, at least in the short term, as it’s a huge upgrade to the company’s credit risk,” said Warut Promboon, managing partner at credit research firm Bondcritic Ltd. “What’s happening to HNA is just the tip of the iceberg of what’s coming for a lot of companies in China.”

Promboon said that the group was too big for the government to let fail and that “HNA is turning into a state-owned enterprise.”

First Step

Bloomberg reported earlier in February that China was nearing plans to take control of HNA and may sell off its airline assets amid the downturn. Saturday’s announcement is the first in a series of steps that will see the government tighten its grip over HNA, some of the people said.

HNA-related shares advanced. Flagship Hainan Airlines Holding Co. climbed as much as 6.7% in Shanghai and Bohai Leasing Co. rose as much as 4.2% in Shenzhen on Monday. HNA Technology Investments Holdings Ltd. surged as much as 62% in Hong Kong.

HNA said the move doesn’t translate to a takeover and doesn’t involve changes in the controlling shareholder. A representative for HNA declined to comment beyond the company’s public statements.

Beyond HNA, the virus has China considering bailing out its hobbled airline industry and the central bank has said it will work on supporting domestic consumption. Factories are being pushed back to work after manufacturing activity slid to a record low in February.

End of Era

HNA’s downfall symbolizes the end of an era defined by excesses.

It was at the forefront of an unprecedented acquisition campaign by Chinese companies, which often paid top dollar for trophy assets ranging from the Hollywood studio behind some Godzilla films to the historic Waldorf Astoria hotel in Manhattan and the AC Milan soccer team. Beijing eventually clamped down on the acquisition spree after debt levels soared to dangerous levels.

Read Bloomberg Businessweek’s 2017 cover story on HNA: The Conglomerate That Troubles China

Closely-held HNA, which started as a regional airline nearly three decades ago with some seed money from George Soros, had been selling off assets after spending more than $40 billion in a buying binge that left it with one of the highest levels of corporate debt in China.

Before the virus hit, HNA was returning to its aviation roots, and in November the group announced it would divide its businesses into airlines, aviation leasing and airports, with the rest being lumped under its “non-aviation asset management” unit. The focus on aviation and tourism backfired as the coronavirus epidemic led to a record number of canceled flights in and out of China.

HNA was one of the most prominent of the Chinese acquirers that began making a splash internationally in the middle of the last decade from near obscurity.

Dalian Wanda Group Co., led by a tycoon who was once China’s richest person, acquired Hollywood assets such as AMC Entertainment Holdings Inc. and Legendary Entertainment LLC. Anbang Insurance Group Co., headed by a chairman who married the granddaughter of former Chinese leader Deng Xiaoping, made global headlines in 2014 with the purchase of New York’s Waldorf Astoria and nearly bought Starwood Hotels & Resorts Worldwide Inc. before backing out of the $14 billion deal in 2016.

HNA stood out as the most aggressive of the lot by throwing tens of billions of dollars into purchasing everything from golf courses to luxury homes across six continents.

The big acquirers attracted greater scrutiny from the Chinese government in recent years after authorities grew wary of the debt they were amassing to build their empires and of the capital outflow. Wanda Group has retreated from its Hollywood ambitions amid government pressure, and Anbang’s business was seized by the government. Its founder, Wu Xiaohui, was jailed.

In HNA’s case, its borrowing costs spiraled out of control and debts climbed to almost 600 billion yuan ($86 billion). While total debt fell to 525.6 billion yuan by mid-2019, its cash pile shrank at a much faster pace to the lowest since at least 2015. Chairman Chen Feng said in December that 2020 would be “the decisive year to win the war” against the company’s long-running liquidity challenges.

In an attempt to stabilize its finances, HNA has been looking to divest multi-billion-dollar assets including plane lessor Avolon Holdings Ltd. and tech company Ingram Micro Inc., people familiar with the matter have said.

China’s leadership is trying to limit the economic impact of the new coronavirus, which emerged in the central city of Wuhan late last year and has since spread around the world, with widening outbreaks from Japan to the U.S.

At a Feb. 21 meeting chaired by President Xi Jinping, officials pledged to be more proactive with fiscal policy and exercise greater flexibility in monetary easing.

The epidemic, which has killed and infected more people in China than anywhere else, is dissuading millions of people from going out to shop, weighing on an economy that was already growing at its slowest pace in three decades. Car sales have plunged more than 90% and S&P Global warned that a prolonged public health crisis could cause the bad loans ratio in China’s banking system to more than triple.

One of the hardest hit industries has been air travel, and HNA owns several carriers besides Hainan Airlines. Globally, about 80% of China flights have been halted and the International Air Transport Association estimates the virus epidemic will cost the industry almost $30 billion in lost revenue.

Local airlines grounded enough planes to carry more than 10 million passengers, reducing China’s huge aviation market to smaller than Portugal’s, according to industry researcher OAG Aviation Worldwide. The government is considering measures such as direct cash infusions and mergers to bail out the crippled industry, people familiar with the matter have told Bloomberg.