A heavily indebted Chinese company collapses into bankruptcy. The Chinese Communist Party gets involved. Top executives go down, the government steps in, and creditors take haircuts that are necessary if they're going to get anything back at all.
The HNA Group, once one of China's most aggressive buyers of businesses overseas, looks set to emerge from its restructuring. The experience of the group, built around the regional carrier Hainan Airlines, suggests a path forward for the property developer China Evergrande Group (HK:3333 and EGRNY), which is collapsing before our eyes under an even-bigger debt burden.
Here on Monday, HNA subsidiaries are meeting online with creditors to discuss their debt restructuring plan. The creditors must approve the restructuring, HNA says in announcing the meeting.
This news comes after HNA said on Friday on its official WeChat social media site that its chairman Chen Feng and CEO Adam Tan have been taken away by Hainan police due to allegations of unspecified criminal offenses.
Shares in HNA's flagship Hainan Airlines (SH:600221) are up 50% so far this year. Trading is suspended today pending the meeting with creditors. Trading resumes on Tuesday.
In all, 11 companies will be reorganized, Reuters reports after seeing a document outlining the restructuring. Most of the group's liabilities will be reduced via debt-to-equity swaps and repayments to shareholders. Creditors say they are owed C¥397 billion (US$61.5 billion) in unpaid debts, but courts have recognized only C¥161 billion (US$25.0 billion) that will enter the restructuring.
The company also said its Communist Party members had been informed of the detention of the top executives by police. Those Chinese Communist Party members were encouraged in a meeting to strengthen Communist leadership within HNA. It is increasingly common for Communist Party cells to form inside a company that may be able to override the decisions of top management in running the business.
In China, the police, courts and Chinese Communist Party operate in concert, so it is extremely likely that anyone who is arrested ends up convicted, often through forced confession of their "crimes."
Parent HNA Group is not listed in its own right. It has a perplexing and confounding corporate structure that involves stakes in many tourism-related businesses, and equally, plenty of noncore investments in totally different industries that have no overlap with its core business.
Last decade, HNA embarked on a US$50 billion expansion that saw it build a large portfolio of trophy overseas real estate and holdings. It bought a 9.9% stake in Deutsche Bank (DB) that made it one of the bank's largest shareholders. It also paid US$6.3 billion for a 25% stake in Hilton Worldwide Holdings (HLT) , making it the hotel chain's largest shareholder.
Convoluted corporate structures are common in China, as we also see with Evergrande, and often are used to obscure the real ownership of companies. Founders mask their ownership by holding voting shares in separate classes of stock or in parent holding companies, leaving it to appear that a listed subsidiary is a public company when in reality insiders control voting rights and the direction of the business.
The flashy purchases of overseas holdings drew the scrutiny of Chinese regulators. Concerned that Chinese companies were overextending themselves and entering industries that they knew nothing about, authorities began asking how HNA Group financed its purchases. All of a sudden, the group threw the jet thrusters into reverse and the company began to sell off holdings. It sold the airport services manager Swissport and the electronics distributor Ingram Micro and said it would focus on airlines and tourism.
When it became clear that the group had overextended itself, a team from Hainan Province entered the company and began a forced restructuring. Its debts at one point exceeded US$100 billion.
Under the terms discussed today, unsecured, small creditors who are owed up to C¥100,000 (US$15,500) will be repaid in full, according to Reuters. Debts above that amount will be paid partly in Hainan Airlines shares, partly by HNA, and partly by other companies. The HNA Group would be split into four new business units, with the equity held by old shareholders wiped out.
Its Hong Kong-listed subsidiary HNA Technology Investment (HK:2086), which makes smart cards and smart-card readers, has advanced 30% so far this year.
The picture isn't so rosy for yet another subsidiary, HNA Investment (SZ:000616), which is a property developer that has expanded into fund management, insurance and other financial products. HNA Investment shares, suffering like China's property sector, are down 24% year to date.
The HNA Group declared bankruptcy in February, with a government-run liquidation team called in to clean up the mess. The company said it had a negative net asset position as of the end of last year.
Chairman Chen founded the airline with Wang Jian in 1989, serving the "Hawaii of China," the southern island of Hainan. Wang, who was co-chairman as well as co-founder, died in France in 2018 while on a business trip. Local police said he appeared to have fallen 15 meters off a wall in the village of Bonnieux while posing for a photo taken by family members.
A blueprint for Evergrande?
The intervention of local and provincial authorities to clear out management and split apart the group is the kind of course that Evergrande may also run.
Evergrande shares rose 8% on Monday in Hong Kong. China Evergrande owes US$305 billion, triple the amount that HNA once owed. Market participants said they believe the bad news is now priced into the stock.
The property developer missed an US$83.5 million payment to holders of its offshore bonds on Friday, and has not indicated how it plans to handle the situation. It has a grace period of 30 days before falling into official default. It owes another US$47.5 million on another offshore bond that comes due on Wednesday.
Its electric vehicle affiliate, Evergrande New Energy Vehicle Group (HK:0708), fell 9.4% on Monday and its shares are off 32% in the last five trading days. The company said on Sunday that it will not proceed with a plan for a secondary sale of shares in mainland China on the tech-focused STAR Market of the Shanghai Stock Exchange.
The company, which has yet to produce a sellable car, said after the close on Friday that it is "encountering serous shortage of funds." It began life as a property developer building hospitals and elder-care facilities. Work has now stopped on some property projects, it says, due to delays in payments to suppliers and construction companies. It is trying to sell off some of those projects. Without an injection of fresh capital, it says it will struggle to complete projects, pay staff salaries and invest into any mass production of new-energy vehicles.