One of China's most aggressive buyers of overseas businesses says it is bankrupt, and will seek reorganizing. Shares of affiliates of the HNA Group have slumped on Monday as a result.
HNA, the parent of the Chinese carrier Hainan Airlines, says it has received a formal notice from Hainan High People's Court, in which a creditor has filed for the reorganization of the company because it cannot pay off its debts.
The subsidiaries Hainan Airlines, HNA Infrastructure and CCOOP also said on Saturday that US$9.6 billion has been embezzled by shareholders and other related parties, according to Reuters. The companies gave no further details, but the announcement sets up the prospect of criminal retribution against the former owners and managers of the companies. It's common practice in China for courts to establish financial fraud in cases where the Communist Party wants to take a tycoon down.
The group, based on the southern island of Hainan known as "China's Hawaii", says it will comply with the court's instructions and "promote the debts disposition actively," trying to protect the interests of creditors while keeping its businesses up and running.
HNA went on a US$50 billion buying spree in 2016 and 2017 that gave it a 15% stake in Deutsche Bank (DB) , a 25% stake in the Hilton Worldwide Holdings (HLT) hotel chain, and full ownership of the information/technology supplier Ingram Micro as well as the chain of Carlson Hotels.
HNA struck a deal in December to sell Ingram Micro to the U.S. private-equity manager Platinum Equity for US$7.2 billion. The Chinese company's subsidiary Tianjin Tianhai Investment bought it in February 2016 for US$6 billion.
The company, like many debt-fueled Chinese conglomerates, went on an acquisition warpath with little apparent rhyme or reason to its purchases other than opportunity. And the whims of its founder, Chen Feng.
The provincial government of Hainan has effectively seized control of HNA and edged out its original management. The company is now being run by Gu Gang, an official who previously ran the Hainan provincial government's investment vehicle. He became executive chairman as well as the company's Communist Party secretary last year as the government took over the group. Another official, Ren Qinghua, came from a Hainan special economic zone to become co-CEO. They have come up with a debt-reduction plan.
Founder and chairman Chen no longer appears on the leadership roster that HNA published on January 26. After the company stopped being able to service its debt, Chen was placed on a debtor list that prevented him from flying or staying in luxury hotels.
Ingram Micro was sold by the subsidiary HNA Technology (SH:600751), which saw its shares sink 9.8% in Shanghai trade on Monday. To indicate how complex the HNA corporate network became, HNA Technology itself was previously a shipping company called Tianjin Tianhai, and took its current shape in 2017 through a reverse merger to be a holding company for Ingram.
The HNA Group, which consists of dozens of subsidiaries, plans to sell off its non-airlines businesses, according to Bloomberg.
Shares in Hainan Airlines (SH:600221), the original operating business and still the conglomerate's flagship, also fell 9.8% in Shanghai on Monday. With 157 planes, it has the fourth-largest air fleet in China, having begun life with one plane in 1993. But HNA Group has stakes in 14 airlines in all, and manages 16 airports, giving it a total fleet of almost 900 planes.
According to Reuters, the HNA Group is now looking for private investors to help it emerge from bankruptcy. But its heavy debt load and very complex corporate structure - of holding companies within holding companies - will require a forensic accountant to translate.
The company has offloaded most of its property purchases, having paid top dollar to acquire trophy buildings in cities such as London and New York. After its acquisition spree, HNA Group ended up saddled with US$90 billion in debt, a chunk of it short-term.
Under President Xi Jinping, the Chinese Communist Party has sought to cut down on the excesses of China's would-be tycoons, who have often sought trophy deals internationally to announce their arrival on the world stage. That has resulted in heightened scrutiny over the financing of such corporate buying sprees, which typically spread company empires into a raft of non-core industries, with little apparent overlap.
The subtext to the campaign, however, has been Xi's move to consolidate power around the Communist Party and himself. China's headlong sprint into capitalism, while encouraged by the party to boost the economy and lift the population out of poverty, has created a class of very wealthy business leaders who present a threat to that dominance.
Most recently, the Chinese Communist Party has sought to take the highest-profile Chinese entrepreneur, Alibaba Group Holding (BABA) co-founder and figurehead Jack Ma, down a notch. Alibaba was prevented from spinning out its Ant Group fintech affiliate, with Ant now likely to become a licensed financial entity under the banking regulator, having avoided such oversight in the past.
Other Chinese conglomerates such as Dalian Wanda and Fosun Group have also been pressed by the government to reveal how they have financed international acquisitions. Wanda has sold off many of its property assets and shed subsidiaries, although Fosun is still going strong.
HNA's dealmaking had produced a windfall for investment banks. It spent US$140 million on banking fees in the six-year period through 2018, largely before it started to come under government pressure. But its banks gradually deserted it, with Bank of America (BAC) , Citigroup (C) , and Morgan Stanley (MS) all refusing to work on any further HNA-linked deals.