For HNA, Bankruptcy Is the Best Bad Option

(Bloomberg Opinion) -- Debt-ridden HNA Group Co., which splashed out over $40 billion on stakes in high-profile companies across the world, has been unwinding and selling down its assets fairly quickly. It didn't even have to accept bargain-basement prices. The firm has been under the government's watch for over a year. Why, then, is it going into bankruptcy?

In a statement Friday, the airlines-to-insurance conglomerate said it had received a court notice that creditors had filed a petition for its bankruptcy and reorganization, stating that HNA couldn't “pay off the debts due and obviously lacked solvency, but still had reorganization value.”  

Even if this sounds logical, the bankruptcy comes as a surprise. The company and its management have long navigated a delicate relationship with Beijing. Over a year ago, the government of Hainan province, where HNA is headquartered, took over the firm and appointed an executive chairman, along with an oversight committee that included state-backed policy lender China Development Bank. In 2018, state lenders had extended a lifeline conditional upon the conglomerate reining in excesses. 

HNA had also managed to offload key assets at good prices. In December, the group finalized the sale of one of its gems, California-based electronics distributor Ingram Micro Inc., for $7.2 billion to Platinum Equity. HNA spent $6.1 billion at the height of a buying spree in 2016. Last year, the company sold airline caterer Gategroup Holding AG to former Goldman Sachs Group Inc. banker Richard Ong's RRJ Capital, a private equity firm that had worked with HNA on other deals. The transaction valued the company at $2.8 billion; it bought the caterer for $1.5 billion.

For another prime but controversial asset, Swissport Group Sarl, HNA navigated a debt-for-equity swap with U.S. and U.K.-based creditors last year. The Chinese conglomerate transferred ownership to the financial investors but “will share in the value creation of Swissport post-restructuring contingent on a future exit valuation.” In doing so, it got out of a tense relationship with the subsidiary but may eventually benefit from any upside.

All those sales and exits make it look like a bunch of astute asset managers were happily at work. But the dismantling of the conglomerate has been endless. It's possible that officials sitting in HNA's offices realized that, too. Perhaps that's why creditors turned to a court resolution. 

For a company like HNA, unwinding a behemoth balance sheet will be a hairy process that could drag on for years. Assets lose value, recovery rates fall and claims are even harder to honor. Covid-19 won't make that any easier. 

Creditors, who initiate bankruptcy filings, aren't left with much bargaining power, either. In HNA's case, it's even more complicated because of the way the group structured deals. As the conglomerate picked up assets across the globe, it took on hedge-fund and private-equity-style financing structures that helped stretch its capital. Loans were backed by the stakes it had purchased. The company entered into complex derivatives to help fund investments. At the time, an executive told the Wall Street Journal, “We try to be a smart investor,” noting that they weren't different from “some of the best private-equity funds.” The goal, he said, was to use leverage effectively. 

In doing so, HNA created layers of ownership, special purpose vehicles and debt, and a host of third-party investors. Given this complexity, paying creditors back isn't straightforward. Some third-party equity holders may rank senior to debt holders elsewhere, for instance.

In theory, bankruptcy is a much cleaner way out – for all stakeholders. U.S. Chapter 11-style proceedings are an efficient way to maximize enterprise value and reorganize what's left. As I've written, this is exactly what China needs. Over the last year, proceedings have moved along quickly, too.

As the creditors said in the filing, there is value in HNA. At least now, there's an end-game in sight, too. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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