China took over the management of debt-laden HNA Group's liquidity risks after the coronavirus outbreak scared travellers and cut off the conglomerate’s main source of income as it struggled to repay its debts.
The government of Hainan, the southern island province where HNA is based, appointed an executive chairman for the company and set up a working group of officials from the municipality, the civil aviation authority and China Development Bank to oversee the business, HNA said in a statement on Saturday. The move came after the conglomerate failed to resolve liquidity difficulties that stretch back to late 2017, it said.
The government rescue of the fallen giant — it was once the top shareholder of iconic companies such as Hilton Worldwide Holdings, Radission Holdings and Deutsche Bank — makes HNA one of the biggest corporate casualties of the outbreak. To limit the economic impact of the virus, which has killed thousands, China is considering bailing out the hobbled airline industry and the People’s Bank of China has said it will work on supporting domestic consumption.
HNA’s downfall also symbolises the end of an era defined by excesses. It was at the forefront of an unprecedented acquisition campaign by Chinese companies, which often paid top dollar for trophies ranging from the Hollywood studio behind some Godzilla films to the historic Waldorf Astoria hotel in Manhattan and the AC Milan football team — not unlike what Japanese firms did in the 1980s before the bubble burst and ushered in the country’s Lost Decade. Beijing eventually clamped down on the unfettered acquisition spree after debt levels soared to dangerous levels.
The working group comprises executives and officials from Hainan Development Holdings Company, Hainan Yangpu Economic Development Zone, the Civil Aviation Administration of China Central and Southern Regional Administration, as well as China Development Bank’s credit management bureau, according to the statement, which didn’t specify details of what the committee will do.
Hainan Development Holdings Chairman Gu Gang was named executive chairman of HNA, with co-founder Chen Feng remaining as chairman, according to a separate statement. Ren Qinghua, director of the management committee at Hainan Yangpu Economic Development Zone, was appointed co-chief executive officer, alongside incumbent CEO Adam Tan.
Ownership of the group is unaffected by the move, a company representative said. Bloomberg reported earlier in February China was nearing plans to take control of HNA.
Closely-held HNA, which started as a regional airline nearly three decades ago with some seed money from George Soros, had been slimming down after spending more than $40 billion (Dh146.9bn) in a buying binge that left it with one of the highest levels of corporate debt in China.
The group was returning to its aviation roots, and in November it announced it would divide its businesses into airlines, aviation leasing and airports, with the rest being lumped under its “non-aviation asset management” unit. The focus on aviation and tourism backfired as the coronavirus epidemic led to a record number of cancelled flights in and out of China.
HNA is part of a group of Chinese giants that began making a splash internationally in the middle of last decade from near obscurity. Dalian Wanda Group, led by a tycoon who was once China’s richest person, acquired Hollywood assets such as cinema chain AMC Entertainment Holdings and filmmaker Legendary Entertainment, which made a number of Godzilla films and the Jurassic World sequel. Anbang Insurance Group, headed by a chairman who married the granddaughter of former Chinese leader Deng Xiaoping, made global headlines in 2014 with the trophy purchase of New York’s Waldorf Astoria and nearly bought the Starwood Hotels & Resorts before backing out of the $14bn deal in 2016, when the hotel chain merged with Marriott instead.
HNA stood out as the most aggressive of the lot by throwing tens of billions of dollars to purchase everything from golf courses to luxury homes across six continents.
These conglomerates eventually came under the scrutiny of Chinese authorities in recent years after the government grew wary of capital outflows and the debt that companies were amassing to build their empires. Billionaire Wang Jianlin’s Wanda Group has retreated from its Hollywood ambitions but none faced harsher punishment from Beijing than Anbang: its founder Wu Xiaohui was jailed and the government seized the business for two years.
In HNA’s case, its borrowing costs spiralled out of control and debts climbed to almost 600bn yuan (Dh315.19bn). While total debt fell to 525.6bn yuan by mid-2019, its cash pile shrank at a much faster pace to the lowest since at least 2015. Chairman Chen Feng said in December that 2020 would be “the decisive year to win the war” against the conglomerate’s long-running liquidity challenges.
In an attempt to stabilise its finances, HNA has been looking to divest multi-billion-dollar assets including plane lessor Avolon Holdings and tech company Ingram Micro.
China’s leadership is trying to limit the economic impact of the virus, which is threatening the world economy. At a February 21 meeting chaired by President Xi Jinping, officials pledged to be more proactive with fiscal policy and exercise greater flexibility in monetary easing. The outbreak is dissuading millions of people from going out to shop, weighing on an economy that was already growing at its slowest pace in three decades. Car sales have fallen more than 90 per cent and S&P Global warned that a prolonged public health crisis could cause the bad loans ratio in China’s banking system to more than triple.
One of the hardest hit industries has been airlines, of which HNA owns several including flagship Hainan Airlines Holding. Global carriers have stopped about 80 per cent of their China flights and the International Air Transport Association estimates the epidemic will cost the industry almost $30bn in lost revenue.
Local airlines grounded enough planes to carry more than 10 million passengers, reducing China’s huge aviation market to smaller than Portugal’s, according to industry research firm OAG Aviation Worldwide. The government is considering measures such as direct cash infusions and mergers to bail out the industry, people familiar with the matter have said.
