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China to Manage HNA Debt as Virus Pushes Group Over the Edge

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China Takes Charge of HNA, Paving Way for Faster Asset Sales

(Bloomberg) -- China took over management of HNA Group Co.’s liquidity risks after the coronavirus outbreak hit the travel industry and the indebted conglomerate’s main source of income, a sign the government is taking more dramatic steps to contain the fallout for business from the epidemic.

The government of Hainan, the southern island province where HNA is based, appointed an executive chairman for the company and set up a working group of officials from the municipality, the civil aviation authority and China Development Bank to oversee the effort, HNA said in a statement on Saturday. The move came after the group failed to resolve liquidity difficulties that stretch back to late 2017, it said.

The government rescue of the fallen giant -- it was once the top shareholder of iconic companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG -- makes HNA one of the biggest corporate casualties of the outbreak. To limit the economic impact of the virus, which has killed thousands, China is considering bailing out the hobbled airline industry and the People’s Bank of China 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.

HNA’s downfall also 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.

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.

Hainan Development Holdings Chairman Gu Gang was named executive chairman of HNA, with Chen Feng remaining as chairman, according to a separate statement. Ren Qinghua, director of the management committee at Hainan Yangpu Economic Development Zone, was appointed co-chief executive officer, alongside incumbent CEO Adam Tan.

The working group on HNA comprises executives and officials from Hainan Development Holdings Co., Hainan Yangpu Economic Development Zone, Civil Aviation Administration of China Central and Southern Regional Administration, as well as China Development Bank’s credit management bureau, according to the statement, which didn’t specify details of what the committee will do.

Ownership of the group is unaffected by the move, a company representative said Saturday.

Read Bloomberg Businessweek’s 2017 cover story: 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 leading to a record number of canceled flights in and out of China.

HNA was one of the most prominent of the Chinese giants 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 trophy 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 to purchase everything from golf courses to luxury homes across six continents.

The conglomerates attracted greater scrutiny from the Chinese government in recent years after authorities grew wary of the debt that companies were amassing to build their empires and 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 conglomerate’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 virus, which is threatening the world economy.

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 outbreak 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 including its flagship Hainan Airlines Holding Co. Globally, about 80% of China flights have been halted and the International Air Transport Association estimates the 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 said.

(Adds more detail on Bloomberg report from earlier in month in sixth paragraph.)

--With assistance from Drew Armstrong.

To contact Bloomberg News staff for this story: Haze Fan in Beijing at hfan40@bloomberg.net;Steven Yang in Beijing at kyang74@bloomberg.net;Vinicy Chan in Hong Kong at vchan91@bloomberg.net;Manuel Baigorri in Hong Kong at mbaigorri@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net;Daniela Wei in Hong Kong at jwei74@bloomberg.net;Sarah Chen in Beijing at schen514@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Shamim Adam

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