How Will HNA’s $700 Billion Debt Crisis Be Handled in the Future?

  • Editor: Victor Torres
  • Author: peacelv
  • Translator: Ranting

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Two announcements on HNA Group’s official website and public website after the close of business on the afternoon of January 22 pushed HNA’s risk mitigation efforts to a new stage.

This announcement conveys several key messages:

First, the working group has been in HNA for one year and has maintained the stability of HNA’s daily operations.

Second, the working group has figured out the base of HNA in a year, formulated a risk resolution program and basically obtained the approval of all parties, and the risk resolution program has entered the implementation stage, and the work of the working group has come to an end in a phased manner.

Third, the next HNA Group’s Executive Chairman Gu Gang and CEO Ren Qinghua will withdraw from the HNA Group’s board of directors, while the working group will continue to do a good job of managing HNA’s stability control.

This risk resolution program, which took a year to develop, will enter the substantive implementation stage in February, and HNA’s real debt situation and debt treatment will also officially surface.

Let’s review some of the ways HNA has handled its debt over the past three years or so.

In fact, the 2019 HNA Group was also stationed in the “Joint Working Group on Risk Resolution”, whose main responsibility is to help HNA resolve the liquidity crisis, including supervision of the flow of new loans obtained by the group, as well as supervision of the group not to divert funds from closed operating enterprises such as aviation, etc., but the specific operation of the HNA Group, asset disposal and personnel appointments, etc. have no decision-making power.

That is to say, the assets sold by HNA Group in 2019, the restructuring contracts between its relevant airline divisions and local governments, etc., are still being led by HNA Group itself.

On February 29, 2020, a newly formed joint working group was stationed at HNA. This working group of more than ten people, from the central bank, CBRC, China Development Bank and many other units, is headed by Gu Gang, chairman of Hainan Development Holdings Limited, the largest state-owned enterprise directly under Hainan Province, and Ren Qinghua, director of Hainan Yangpu Economic Development Zone Management Committee, is the executive deputy head. The other deputy leaders are representatives from the civil aviation system as well as creditors.

Gu Gang and Ren Qinghua were also appointed to HNA Group’s board of directors at the same time, serving as the company’s executive chairman and chief executive officer, respectively, with three of the original HNA Group board members out.

When the working group moved in, there were up to several trillion dollars of internal capital transactions within the HNA Group, and for every merger and acquisition made previously, there were multiple layers of structures set up, various cross holdings, and funds transferred at will. It took the working group several months to mobilize all the financial staff of HNA Group to reconcile the accounts, before the various financial chains were clearly organized.

At the same time, the working group, together with intermediaries, drew for the first time a complete tree diagram of the equity relationship of nearly 2,300 enterprises in the HNA Group, and for the first time mapped out the assets and liabilities of the HNA Group, which is equivalent to mapping out Wang Qishan’s HNA to prepare for future division or cannibalization.

At the same time, there are also reports that HNA has not stopped its M&A deals despite the fact that it is in the process of risk resolution.

On January 20, 2021, HNA Foundation announced that it intends to acquire 100% equity interest in Germany HNA Airport Group Ltd. and 56.7% equity interest in Yangpu Guoxing Yacht Manufacturing Co. The announcement shows that within 30 days after the agreement takes effect, HNA Foundation will pay the relevant shareholders of Yangpu Yacht and Germany HNA Airport Group 60% of the equity transfer amounting to 390 million yuan.

On the same day, the SSE issued an inquiry letter to HNA Foundation, requesting it to provide additional information on the payment method and funding source of the transaction, and whether it would cause pressure on the company’s cash flow. Up to now, HNA Foundation has not yet replied to the above inquiry letter.

On December 18, 2020, HNA Investment (000616, SZ) announced that it wanted to spend RMB 826 million to sign a one-time 15-year lease for four defective hotels from related parties to expand its retirement business, which received wide attention from investors.

On December 22, 2020, the Shenzhen Stock Exchange issued a concern letter to HNA Investment, requesting an explanation of the main considerations for entering into long-term lease contracts with related parties despite the poor operation of the subject of the transaction and the obvious defects of the relevant assets, whether there is any transfer of benefits to related parties, and whether it is conducive to safeguarding the legitimate rights and interests of listed companies and small and medium shareholders.

According to media reports, in December last year, the U.S. private equity firm has reached an agreement with HNA Technology, a listed company of HNA Group, to acquire the entire stake held by HNA Technology in Ingram Micro Inc. HNA Technology also released a major asset sale proposal on the SSE, confirming the sale of Ingram Micro International, with the transaction consideration calculated on the basis of US$5.9 billion.

HNA’s Next Step

The current board members of HNA Group, Chen Feng and his son are listed

There has been no public disclosure of HNA Group’s current assets and liabilities. However, according to HNA Group’s debt issuance report, HNA Group has $706.726 billion of debt pending as of the first half of 2019. How HNA Group’s huge debt is handled is the most critical element of the risk resolution program.

If the risk resolution program is implemented in accordance with the principles of marketization and rule of law, the possible path will be for HNA Group or creditors to apply to the court to enter into bankruptcy reorganization procedures to resolve HNA’s debt and capital problems through the reduction or deferral of relevant claims, the disposal of assets, and the introduction of strategic investors.

Bankruptcy reorganization refers to the restructuring of business and adjustment of debts under the auspices of the court and with the participation of interested parties, specifically for enterprises that may have or have had reasons for bankruptcy but have the value of maintenance and hope for regeneration, in order to help debtors get out of financial difficulties and restore their business capacity. The goal of a bankruptcy reorganization proceeding is to bring a business back to life and avoid liquidation. The purpose of bankruptcy liquidation, on the other hand, is to enable the creditors of the bankrupt enterprise to be paid fairly and to bring the bankrupt enterprise to extinction.

At present, HNA Group still has a number of airlines including HNA Holdings (600221), Tianjin Airlines, Capital Airlines and Xiangpeng Airlines, and a number of listed companies such as HNA Technology (600751), HNA Foundation (600515) and HNA Holdings (600221). Previously, including Urumqi Airlines, Capital Airlines, Beibu Gulf Airlines and Western Airlines have successively signed restructuring framework agreements with the local government, but the implementation of the restructuring was suspended due to HNA Group’s overall program of risk mitigation. The future fate of these airlines, as well as the direction of the listed companies, will be gradually revealed with the implementation of the risk resolution program starting in February. Future dispositions are also subject to upheaval and change as the extremely tense political situation within Zhongnanhai evolves. The result of the tug-of-war between the parties is the key to ultimately determine the future direction of HNA.

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