The Hainan government is said to be planning to take over HNA Group and sell off its airline assets, as the indebted conglomerate’s ongoing struggles to meet its financial obligations reach a crisis point.
The provincial government has been forced to make the move as the impact of COVID-19 on HNA’s airline businesses – which include HNA Airlines and Hong Kong Airlines – has hit the conglomerate’s cashflow, according to a source cited in Bloomberg.
With the owner of 14 airline companies having reportedly placed its foreign pilots on unpaid leave two weeks ago, HNA’s management is said to be locked in talks with officials of its home province regarding the take over as travel restrictions imposed to combat the spread of the virus grounded two-thirds of China’s flights.
Under the plan, which is still being formalised, the government would sell most of HNA’s airline assets to the mainland’s big three carriers, Air China, China Eastern Airlines and China Southern Airlines.
Market analysts say that HNA’s entire RMB 1 trillion ($142 billion) asset portfolio might end up being put on the market, with the government seeking buyers for the group’s real estate holdings, including hotels and residential buildings in Hainan, Beijing and Shanghai.
HNA Group had not replied to an enquiry from Mingtiandi at the time of publication.
Taking Over a Failing Business
HNA has been racing to sell off assets, including its property holdings, to meet debt payments following a $50 billion spending spree on overseas assets that saw the company’s debt pile climb to RMB 600 billion ($85 billion) in 2018.
“Coronavirus may have tightened the screws on HNA, but the company has been facing existential threats for some time,” said Adamas Asset Management managing director, Brock Silvers, who predicted last year that the company would be lucky to survive 2019 as an independent entity.
Silvers said that HNA’s debt levels have been unsustainable, while its capital deployment has been “insufficiently productive”.
“At this point the Hainan provincial government, which has long been deeply connected to HNA management, and exposed to its balance sheet, may have little choice but to take over control of the company,” Silvers noted.
Pledging an End to Liquidity Challenges
The company’s cash flow difficulties have forced it to delay staff salary payments over the past twelve months, prompting chairman Chen Feng – known as the the “Buddhist billionaire” – to pledge in December that 2020 would bring an end to the company’s liquidity challenges.
Silvers told Mingtiandi that while the virus’ impact on the airline industry will have taken a toll on HNA’s finances, the company’s debt problems run much deeper.
“The virus will provide a convenient excuse should Hainan Province now step in to pay for Chen Feng’s wild dealmaking, and, should that occur, the entirety of HNA’s portfolio will likely be available,” he added.
Selling at a Loss
The Hainan government’s plan to carve up the group comes as continuing pressure to meet debt repayments has forced HNA to sell off assets at a loss over the past four months.
Last November, HNA sold its last asset in the UK to Hong Kong-based investment firm Sun Hung Kai & Co and Australia’s Macquarie Group for £100 million ($129 million) at a 24 percent markdown.
The group had originally paid £131 million ($129 million) for 17 Columbus Courtyard in London’s Canary Wharf in 2016.
With losses continuing to mount, HNA is said to have sold a Shanghai office project to China Cinda Asset Management in January for an undisclosed sum, after disposing of a set of US golf courses in November, with that disposal also taking place at 24 percent less than what HNA had paid to acquire the properties in 2016.
Switching from Buyer to Seller
The mass sell-off by HNA parallels the fate of commercial real estate developer Dalian Wanda, which the government has branded a dangerously indebted company.
Over the past two and a half years, the Beijing-based firm has sold off nearly all of its $5 billion overseas portfolio as well as liquidating much of its hospitality and cultural divisions on the mainland.