HNA Parent Co Pledges Shares for Loan After $15B Deal Spree

After a 2016 run of more than $15 billion in acquisitions the Hong Kong-listed wing of China’s HNA Group may have hit a financial speed bump.

HNA Holding Group notified the Hong Kong stock exchange on Monday that its controlling shareholder, Hong Kong HNA, had pledged the majority of the company’s shares as what appears to be collateral for a loan.

The financial maneuver is seen by many analysts as a sign of pressure on the company’s cash flow following its recent purchases of a wide range of assets. In February HNA scooped up chip maker Ingram Micro, and in October agreed to pay Blackstone $6.5 billion for an approximately 25 percent stake in Hilton Hotel Group.

Accessing More Cash After a Record Deal Run

Hong Kong HNA has pledged nearly 6.4 million of its just over 6.5 million shares in HNA Holding Group, “as security for certain banking facilities or guarantees,” according to the company’s statement. The pledge accounts for more than 98 percent of its 57 percent stake in the offshore listed subsidiary of the mainland conglomerate.

HNA group, which is the parent firm of Hainan Airlines, the mainland’s first privately held passenger carrier, has been expanding in recent years into fields as diverse as microchips and real estate. The company and its affiliates are leading cross-border property investors, having in the last 18 months amassed holdings including grade A office buildings in London and development sites in Hong Kong that cost more than $1.8 billion, according to published accounts.

In its announcement, HNA Holding Group did not specify a purpose or reason for the loan, however, analysts seem to agree that using the company’s shares as collateral presents new challenges for the company.

HNA’s loan arrangement also comes soon after China’s government began clamping down on capital outflows, requiring extra approval steps for overseas investments of $1 billion or more.

Markets seem pessimistic regarding HNA’s financial maneuvering. Following the announcement, shares in HNA Holding Group slid 6.35 percent yesterday to close at HK$0.295 per share. At Monday’s closing price Hong Kong HNA’s pledged shares would be worth HK$1.88 billion ($242 million).

More HNA Deals on the Way

Not everyone sees HNA’s recent financial maneuver as a red flag, however.

“They’re moving as fast as they possibly can on the investment front, and HNA’s newly collateralized bank debt looks to be just a mechanism to rapidly ensure a constant access to investment capital,” says Brock Silvers, founder of Shanghai-based private equity firm Kaiyuan Capital.

And that quick path to cash could be needed for HNA to continue its acquisition streak. “I suspect that a significant portion of that capital has already been internally allocated to unannounced deals,” Silvers adds.

Whatever the rationale behind this most recent financing maneuver, it could signal a need for HNA to improve its financial engineering skills to keep pace with its blistering deal rate. The company has primarly leaned on mainland financial resources for its cross-border acquisitions leaving it lacking the structures and relationships necessary to achieve competitive financing for its growing global footprint.

A Prolific and Eclectic Investor With a Fondness for Blackstone

HNA Group, which is controlled by “Buddhist billionaire” Chen Feng, has surprised market observers this year with its aggressive bids for assets.

In November the group bid HK$8.8 billion ($1.13 billion) for a site near Hong Kong’s old international airport, setting a new record and doubling the former highest price paid for land in the area by paying HK$13,500 per square foot for the property. “I really don’t understand why the winning buyer paid such a high price,” Joseph Tsang, managing director of JLL Hong Kong told the SCMP at the time. “As far as I know others submitted bids between HK$8,000 ($1031) and HK$9,000 ($1160) per square foot.”

In October HNA surprised Seattle residents by paying $137 million for ten golf courses near the city in America’s northwest.

Like Anbang Insurance, another of China’s most aggressive cross-border investors, HNA has shown an affinity for Blackstone assets, buying the US private equity firm’s 66 percent stake in Hong Kong-listed developer Tysan for $337 million earlier this year. Also in 2016 HNA purchased Blackstone’s stake in mainland IT provider Pactera for $675 million and in October bought a roughly 25 percent stake in the Hilton Hotel Group from the private equity firm for $6.5 billion.