Rare Guarantees on HNA Dollar Bonds Give Solace to Investors

(Bloomberg) -- Debt-laden Chinese conglomerate HNA Group Co. has given its creditors cause for concern in recent months, but its international bondholders are finding some comfort in guarantees provided by the local parent company.

The structure means that overseas investors would in theory have a direct claim against the Chinese-based entity in the event of any default or bankruptcy proceeding. While there's no indication that such events are in the offing, scrutiny of such protections has increased after the group's units missed payments to several Chinese banks and yields on some of its units' notes traded at times in recent months at levels considered distressed.

HNA said earlier this month that its finances are “very healthy.” A representative for the group wasn't able to immediately comment.

Investors will be more comfortable with HNA securities that have direct onshore guarantees, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

Previous Chinese corporate debt failures have resulted in more pain for overseas investors than for domestic creditors, in part due to the lack of such guarantees that would have given money managers a pathway to local Chinese courts. Creditors outside China suffered heavy losses about two decades ago when Guangdong International Trust & Investment Corp. folded and Fujian International Trust was liquidated after defaulting on overseas obligations.

At least four offshore bonds sold by HNA Group International Co. are guaranteed by the onshore parent HNA Group, Bloomberg-compiled data show:

• $473 million 8.125 percent bonds due 2018
  • Has gained 4.7 cents to 97.7 cents on the dollar this month
• $300 million 6 percent 2019 securities
  • Has risen 9.3 cents to 94.1 cents on the dollar this month
  • $300 million 7 percent 2020 securities
    • Has gained 5 cents to 93.1 cents on the dollar this month
    • $200 million 6.25 percent bonds due 2021
      • Has gained 7.8 cents to 88.9 cents on the dollar this month

      Recent Chinese defaults such as that of property developer Kaisa Group Holdings Ltd. in 2015 offered relatively high recovery rates due to high asset values even without onshore guarantees. But that isn't a true reflection of risks overall, according to ANZ.

      “Onshore creditors get better treatment and where we have seen Chinese bond defaults, going back to Gitic and Fujian, offshore creditors have often not fared well,” said Gallimore.

      See also: analysts debate how an HNA default could affect markets

      Only about nine percent of all outstanding dollar bonds issued by Chinese companies are guaranteed by entities in the nation, according to data compiled by Bloomberg.

      The “quite rare” guarantees have yet to be tested as there haven't been any offshore defaults on such notes, according to Christopher Lee, managing director of corporate ratings at S&P Global Ratings.

      S&P gives a ccc+ credit assessment for HNA, which indicates a default probability of about 35 percent based on the rating firm's default sample for greater China for the past 17 years, Lee said. “With HNA, the question is whether the group has the capacity to repay that's unclear,” he said.

      Chinese creditors have responded to concerns among overseas investors by offering deeds that enhance their creditworthiness. Still, bonds with onshore guarantees offer clearer legal protection and potential recovery to offshore noteholders than securities with so-called keepwell deeds, one common kind of sweetener, according to Moody's Investors Service.

      “In theory, these offshore bondholders are in the same position as other senior unsecured debt creditors in the onshore market, and can take legal action against the guarantor in Chinese court,” said Ivan Chung, head of greater China credit research & analysis at the ratings firm.

      --With assistance from William Hau and Lianting Tu

      To contact the reporter on this story: Denise Wee in Hong Kong at dwee10@bloomberg.net.

      To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

      ©2018 Bloomberg L.P.

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