HNA Fails to Make Payment on $4B Ingram Micro Buyout Loan

A unit of China’s HNA Group has failed to repay $750 million owed from its buyout four years ago of a US technology distributor, as the cash-strapped conglomerate’s credit problems continue to mount despite selling off a Shanghai office tower for RMB 3.6 billion ($510 million) earlier this year.

In an announcement to the Shanghai stock exchange last week, HNA Technology Co Ltd said that the missed repayment was on a $4 billion loan secured from lender Agricultural Bank of China in 2016 to finance the group’s $6 billion buyout of US tech products distributor Ingram Micro.

HNA was due to make the payment on 5 May after originally borrowing the capital through subsidiary GCL Investment Management, however the company now says that the state-controlled bank has agreed in principle to a request to delay the repayment, although a formal agreement has not yet been signed.

Fumbling the Payback Plan

Under the terms of the original loan, HNA had been due to make a $350 million payment in September last year with a further $400 million set to be repaid in December. Both amounts had been rescheduled for 5 May this year, according to HNA’s bourse filing, with experts now arguing over whether the cash-strapped group has once again defaulted on its credit obligations.

Brock Silvers, CIO of Hong Kong’s Adamas Asset Management, indicated that by failing to make payment before the deadline while it continues to seek a formal agreement to extend the loan, HNA is technically in default on the credit obligation.

“This may not be meaningful if no other HNA debt contains cross-default triggers, but the situation reveals the depth of HNA’s illiquidity,” Silvers said, adding that the “recent government takeover was a de facto admission that the authorities no longer believed HNA management could resolve the crisis”.

NYU Shanghai professor David Yu pointed to HNA’s ability to reach even an informal agreement with its lender as lessening the severity of the financial setback.

“Although the payment extension has created challenges for the lenders, given that they have agreed to extend the deadline, this is not a technical default, Yu said. He added that, “In some ways, it should be taken as a positive sign that the group has managed to come to an agreement with its lenders.’

Stock Exchange Asks for Explanation

HNA’s disclosure of the payment fail, which was made in response to an official request from the Shenzhen stock exchange, comes just over two months after the indebted conglomerate was put under the control of officials of the Hainan government as it continued to struggle with the financial hangover of a $50 billion acquisition binge that saw it rack up debts that totalled RMB 600 billion by 2018.

“HNA is currently encountering many problems in its ability to pay its debts and management issues involving different company factions,” said Shen Meng, a director at boutique Beijing investment bank Chanson & Co. “Under scrutiny from Beijing, the group has to sell off all of its non-core assets, as the company’s complex structure, loans and array of non-core businesses have made unwinding its investments difficult.”

Shen added that he expects HNA will have to sell Ingram Micro, acquiring which was the original rationale for the loan from the Agricultural Bank, at an unfavourable price.

Fighting a Death Spiral

With government officials now at the controls of the conglomerate, which owns 14 air carriers, including Hong Kong Airlines, HNA has continued to put assets up for sale to keep the company afloat.

In addition to completing the sale of HNA Tower in Shanghai to China Cinda during the first quarter, the newly appointed management team is said to be looking for buyers for the company’s airline assets, with market analysts predicting that the HNA’s entire RMB 1 trillion asset portfolio might end up being put on the market.

Adamas’ Silvers said that with assets continuing to be divested, little of HNA may remain at the end of the process.

“The economic environment, however, is surely complicating the disposal process, and today’s default may just reflect management’s attempt to wait out the economic cycle,“ Silvers noted.

Bond Investor Brouhaha

The state-appointed management team may be facing some investor resistance to its efforts to rework HNA’s balance sheet, with tensions erupting three weeks ago following a rushed negotiation of a one-year debt payment moratorium on $163 million of its bonds.

With investors angered by the last-minute notice for a bondholders meeting, HNA issued an unsigned public statement criticising the company’s finance department, blaming its own team members for mishandling the process.

HNA is now led by Gu Gang, the chairman of Hainan’s main investment body, Hainan Development Holdings, who was named in March as HNA’s executive chairman and head of the newly formed Hainan HNA Group Joint Working Group.

At the same juncture, Hainan Yangpu Economic Management Development Zone Management Committee director Ren Qinghua was appointed co-CEO of the group alongside incumbent CEO Adam Tan, while former HNA directors Zhang Ling, Bao Qifa and Chen Wenli all left their positions.