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R.I.P. HNA, and the $143 Billion Empire You Built

Anjani Trivedi and David Fickling

(Bloomberg Opinion) -- The house of HNA Group Co. may be no more, bringing an end to the dramatic rise and fall of one of the biggest buyers of global assets in recent years. It was about time.

The Chinese government is planning to take over the airline-to-insurance-to-property conglomerate that splashed out over $40 billion in recent years to buy assets including stakes in Hilton Worldwide Holdings Inc. and Deutsche Bank AG and airplane lessor Avolon Holdings Ltd., Bloomberg News reported citing people familiar with the plans. A government seizure would mark the final step in an unwinding of the closely held and debt-encumbered behemoth that began more than two years ago.  

In theory, Beijing was already running the show behind the scenes. In early 2018, as Anbang Insurance Group Co. (another binge-buyer that scooped up assets like New York’s Waldorf Astoria Hotel) was being taken over by the Chinese government, HNA was extended over $3 billion of credit lines by large state-owned lenders to keep going. Since then, on Beijing’s directive, it has sold off assets and attempted to retreat to its core airline-related business. Despite state support, HNA has still been late to make payments on bonds and unable to effectively run the sprawling businesses it bought.

An official takeover would mean ownership changes at its foreign affiliates and subsidiaries. Would Ingram Micro Inc., the Irvine, California-based electronics distributor HNA bought in 2016, effectively become a Chinese state-owned enterprise? And if it did, would the company then have to go back to the Committee on Foreign Investments in the U.S. for approval?

Under its existing agreement with CFIUS, Ingram Micro is required to operate as a standalone company, and is subject to annual audits of its compliance with certain operating and security agreements, according to Moody’s Investors Service. The company’s board composition is governed by an agreement with CFIUS and the U.S. Defense Department. 

Another subsidiary, Swissport Group Sarl, a ground handler, serves over 300 airports and millions of metric tons of cargo through over 100 warehouses globally. HNA representatives comprise a majority of the board. 

If the government officially takes control of HNA, those relationships will get more complicated. Just this week, the U.S. State Department designated five Chinese state-owned media outlets as foreign missions, increasing their reporting requirements around property and personnel. Waltzing onto foreign boards or owning overseas real estate isn’t as easy for Chinese entities as it once was.

It also makes sense that Beijing would act now, in the teeth of the coronavirus epidemic.

There’s no doubt that with the outbreak all but halting the real economy, hard-up borrowers are coming to the fore. Analysts had long seen HNA’s indebtedness as a significant risk to the financial system. To fund the borrowing spree that fueled its risk, the company spun a complex web of debt between subsidiaries and affiliates, using its units as collateral at times to take on yet more debt.

Now, Beijing is  opening the spigots and relaxing bad loan limits to encourage banks to lend more freely and keep the economy ticking over. In this emergency environment, the ongoing risk of a collapse in HNA’s enormous net debt pile — worth $69 billion at the end of June, bigger than the borrowings of PetroChina Co. or Walmart Inc. — isn’t helping. You’re less likely to extend credit to a struggling business if you think your existing loan book might turn bad.

It’s never easy to undo the excess of an M&A binge, and HNA’s large and labyrinthine balance sheet has meant even its wave of selloffs has barely moved the needle. While total assets have fallen by about $46.53 billion, to $142.8 billion, since their peak at the end of 2017, net debt is actually marginally up, making it increasingly difficult for HNA to service its borrowings. Affiliates and subsidiaries like Ingram Micro and Swissport have already distanced themselves, placing clauses in debt agreements that protect their cash flows. Throughout HNA's history, operating income has only occasionally run ahead of interest payments.

To the extent that management has been able to keep these plates spinning at all, it's likely to have depended heavily in recent months on the way that HNA's investments in logistics, air transport, catering and retail have given it a presence throughout the sinews of China's economy, and the world’s. The coronavirus represents a critical blow to that proposition. China's aviation market has shrunk from the world's third-biggest to 25th place because of the infection. Hotels and shopping malls are empty. Cash is barely flowing.

Two years on, Beijing is still trying to shed the assets of Anbang, now renamed Dajia Insurance. Officially unwinding the House of HNA will prove a much hairier task. But China may have no other options left.

To contact the authors of this story: Anjani Trivedi at atrivedi39@bloomberg.netDavid Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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