Coronavirus Claims Chinese Travel and Finance Conglomerate HNA

(Bloomberg Businessweek) -- As it bought and borrowed its way to becoming one of the country's most prominent private companies, travel and finance conglomerate HNA Group Co. sought to embody a new brand of Chinese capitalism: aggressive, unafraid of risk, and above all global, with assets and operations on every inhabited continent. Its co-founder and chairman, a devout Buddhist named Chen Feng, styled himself as a sort of Asian Warren Buffett, advocating a “harmonious” management style based on Confucian principles and boasting that HNA would one day be among the world's 50 largest corporations.

That dream, it turned out, couldn't withstand problems close to home. On Feb. 29, the government of Hainan, the island province where HNA is based, began taking control of the company, appointing new leaders and assuming management of its debts. The move, the first step in what could be a slow-motion takeover, will see HNA's remaining assets sold off, according to people familiar with the matter. It paves the way for a humiliating end to one of China's most remarkable corporate stories, one that saw a little-known conglomerate become the core of an international financial empire, all run from an out-of-the-way resort island in the South China Sea.

The proximate cause of HNA's downfall is, of course, the new coronavirus outbreak that brought China's economy to a virtual dead stop, taking an especially heavy toll on travel and tourism. Globally, about 80% of China flights have been halted, and the International Air Transport Association estimates the virus epidemic could cost the industry almost $30 billion in lost revenue.

But the seeds of HNA's demise were sown long before the virus emerged in central China late last year. From the earliest days of HNA's expansion, Chen and other top executives sought to collect a seemingly random assortment of trophy assets around the world with competing mandates and vastly different challenges. The purchases ranged from blue-chip Manhattan real estate to an airport ground-handling company, a computer distributor, and even a hedge fund. HNA, which Chen started as an airline, would do all this by amassing one of the largest debt loads in the world—about $86 billion at the end of 2017—and spending more on interest that year than any other nonfinancial company in Asia. Perhaps most audaciously, it would acquire these assets—which included major stakes in companies such as Deutsche Bank AG, the most important lender in Europe's largest economy—without disclosing much about HNA's finances or the identities of its ultimate owners.

“Its aggressive expansion style with high debt levels, which … benefited from China's decades-long high economic growth, broke down when China started to tighten credit amid a decelerating economy,” says Liu Feng, a Hainan Normal University professor who studies Hainan's economic policies. “HNA's management was aware of the problem years ago, but the group is like a big ship—it's so difficult to change direction.” In a statement, HNA said the move doesn't amount to a takeover and won't change its controlling shareholders. A representative for HNA declined to comment further.

HNA's time at the top of China's corporate pile was brief. In 2017 it seemed determined to announce its arrival on the world stage, putting on glitzy events at the Petit Palais in Paris and Hampton Court Palace in London. An unprecedented dealmaking spree had given it a quarter of hotelier Hilton Worldwide Holdings Inc., 10% of Deutsche Bank, and a vast array of high-end real estate, including a Park Avenue tower for which it paid an eye-popping $2.2 billion.

Serious problems were mounting even then. In April of that year, Guo Wengui, a wealthy Chinese businessman who lives in New York, alleged that HNA was connected financially to the families of top Communist Party officials, a public airing of rumors that had circulated for years in financial circles and contributed to decisions by some investment banks to avoid doing business with HNA.

HNA vociferously denied Guo's claims and sued him for defamation, but it struggled to present a convincing alternative account of its ownership structure. Its largest listed shareholder, Guan Jun, controlled a stake worth as much as $18 billion but was a virtual ghost, almost never seen in public. When Bloomberg News reporters visited addresses associated with Guan in Beijing and Hong Kong, they had no luck finding him: The office of a company he was listed as controlling was empty and locked, while an apartment Guan had given as his address was occupied by someone else.

Aware that questions about its ownership were becoming an obstacle to expansion, HNA made what it described as a complete disclosure. Guan, Chief Executive Officer Adam Tan told the Financial Times, had just “held the stake for us” before transferring it to an HNA-affiliated foundation. The casual admission that a putatively major shareholder was being used as a straw man arguably raised more questions about HNA than it answered, as did the company's statement that, from then on, it would be controlled primarily by two previously unknown charities. Unsurprisingly, HNA increasingly found its attempts to acquire companies abroad stymied, in particular by the Committee on Foreign Investment in the United States, which often scrutinizes takeovers of U.S. companies by overseas buyers for security reasons.

By then, HNA was facing pushback at home. As several acquisitive conglomerates—including Anbang Insurance Group, Dalian Wanda Group, and Fosun International—expanded their global empires, the Chinese government fretted about whether their borrowing could pose a threat to the nation's economy. Banking and foreign-exchange regulators began reviewing their deals, and officials signaled the companies would be expected to rein in their ambitions. The state's most dramatic move came early in 2018, when China's insurance regulator took control of Anbang, saying intervention was needed to head off threats to its solvency. The company's founder ultimately received a prison sentence.

HNA was stepping up its own sales as the Anbang seizure unfolded, unloading assets that included shares in Hilton and Deutsche Bank, U.S. and Australian office towers, and the site of Hong Kong's old Kai Tak airport, where it planned an ambitious real estate project. By last spring, the fire sale topped $25 billion. There were obvious signs, though, that the disposals weren't raising enough money to cover HNA's debts. In April an HNA unit, CWT International Ltd., missed payments, prompting creditors to seize some assets; soon after, HNA failed to repay a 1.5 billion yuan ($215 million) bond.

Through it all, HNA insisted that it intended to refocus on its core of running airlines and related travel businesses. But trouble found it even in those industries. Before the coronavirus outbreak began in late December, the company was struggling to keep alive Hong Kong Airlines, which it once hoped to develop into a rival to the city's flagship carrier, Cathay Pacific Airways Ltd. In December, airport authorities impounded seven Hong Kong Airlines planes after it fell behind on its bills.

It's conceivable HNA might have limped on in the absence of the virus, selling assets just fast enough to keep a step ahead of its many creditors. But it's also fair to argue that its ultimate demise was only a matter of time, and this winter's surprise crisis in China merely moved it up a few months. Either way, it will serve as a cautionary tale.

“We'll continue to witness more Chinese companies ambitiously extending their footprint globally, but I think they will become more rational than what we have seen in recent years,” says Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “After all, you would be more cautious after seeing your peers hit hard back to the ground.” —With Daniela Wei

To contact the editor responsible for this story: Emma O'Brien at eobrien6@bloomberg.net, James Ellis

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