Things to Watch for in HNA's Results: Debt, Debt and More Debt

(Bloomberg) -- How bad would liquidity have to get for one of China’s largest companies to dump about $13 billion in assets in less than four months? Investors may find out and get a sense of whether the disposals are enough when debt-laden HNA Group Co., the once-high-flying conglomerate, releases its results as soon as this week.

The 2017 annual report will provide the most extensive details yet of HNA’s financial distress before it began offloading property from Hong Kong to New York, and selling shares in companies from Hilton Worldwide Holdings Inc. to Deutsche Bank AG in 2018. More disposals are on the way, as HNA still has at least $7 billion in real estate and stock for sale, according to a Bloomberg tally.

The disposals are emblematic of China’s sudden loss of appetite for foreign trophy assets. HNA and other acquisitive conglomerates such as Anbang Insurance Group Co., Dalian Wanda Group Co. and CEFC China Energy Co. are now hunkering down after going on a multiyear buying binge gobbling up everything from New York’s Waldorf Astoria hotel to large stakes in Deutsche Bank.

Still, things have been looking up lately for HNA as the asset sales have helped some of the conglomerate’s bonds rise more than nine percent from their lows in mid-December. Also, Chinese President Xi Jinping recently announced measures to bolster the economy in HNA’s home base of Hainan, which could benefit the embattled group.

Closely held HNA declined to comment for this story. Below are some metrics that analysts and investors will watch for to give them a better picture of HNA’s financial situation.

Borrowing Costs

In the first half of last year, HNA paid more interest than any other Asian non-financial company and ranked fifth worldwide, according to data compiled by Bloomberg. Borrowing costs soared to above $2 billion during the period, more than what HNA could cover through its earnings before interest and taxes -- a rarity for a company of that size.

Then things got worse. HNA sold China’s most expensive short-term dollar bond in early November and one unit paid a record coupon in China’s bond market in January. Concerns about the conglomerate’s finances deepened as news spread about its units missing bills and bank payments, which HNA countered by saying it had a healthy debt structure and that it wouldn’t default on borrowings anytime soon. Bonds of a couple of the conglomerate’s units fell to record lows late last year.

Leverage

Total debts, which stood at 590 billion yuan ($93 billion) as of June, should also be in focus. In December, HNA provided an update that those debts had increased to 637.5 billion yuan by November.

The June number was almost 28 times the group’s first-half Ebit. Worldwide, only five non-financial companies with assets of over $100 billion had a higher multiple, according to data compiled by Bloomberg.

Another debt figure that will be in the spotlight will be how much credit the group had available from Chinese banks as of the end of last year. HNA has said it had about 310 billion yuan of untapped credit lines as of mid-December.

Things to Watch for in HNA's Results: Debt, Debt and More Debt

Cash

The group, whose businesses range from aviation to hospitality and property, may have among the biggest cash piles in corporate China -- it had 144 billion yuan of cash and equivalents at the end of June. But that was still below the 185 billion yuan in short-term debt it had during the period. Even if you were to add short-term investments and Ebit to that pile, it would still fall short of the near-term debt obligations.

Having a smaller cash pile than one’s short-term debt isn’t necessarily cause for alarm because that’s the case at some companies like Toyota Motor Corp., whose investment-grade credit rating allows it to roll over borrowings for cheap. But HNA has to refinance debt at much higher costs, exacerbating its financial condition and illustrating why it would need to resort to large asset sales to stay afloat.

In the face of a liquidity crunch HNA is said to have told creditors early this year that it planned to sell about $16 billion in assets during the first half of 2018. The group has disposed of $13 billion this year, with the biggest being the $6 billion sale of its Hilton Worldwide stake.

So will $16 billion be enough? Some analysts said that may not be the case even if HNA raises enough cash to cover its immediate debt and that the government’s scrutiny of high-profile dealmakers may also drive disposals. Anbang former Chairman Wu Xiaohui is waiting for a court ruling on charges fraudulent fundraising and the government is said to be preparing the sale of some of the insurer’s assets. CEFC, which last year agreed to buy a $9 billion stake in Russian state energy giant Rosneft PJSC, has also been facing mounting government pressure.

"The consideration isn’t purely from a commercial perspective," said Castor Pang, head of research at Core-Pacific Yamaichi HK. "They may need to further cut down their overseas exposure to address government policy."

Things to Watch for in HNA's Results: Debt, Debt and More Debt

Profitability

While assets and sales surged 19 percent and 92 percent, respectively, in the first half of last year, profit didn’t keep pace. Net income climbed 47 percent but was only 0.2 percent of assets, ranking its return on assets among the world’s lowest for a non-financial company of HNA’s size, according to data compiled by Bloomberg.

Things to Watch for in HNA's Results: Debt, Debt and More Debt

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