HNA Bond Rally Clouded as S&P Sees 35% Chance of Default

(Bloomberg) -- Debt-laden Chinese conglomerate HNA Group Co. has managed to shore up confidence among bond investors, but a record rally in its securities last month is overshadowed by worries about its crippling debt levels. 

The rebound has been spurred by the group’s plans to sell assets to repay debt and support from some lenders. The once-voracious hunter of global trophy assets is reversing course after the government soured on overseas acquisitions and debts piled up. 

Still, HNA, a major shareholder in well-known names such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, faces concerns over its ability to refinance short-term borrowings, which ballooned to a record high of 185.2 billion yuan ($29.3 billion) as of the end of the end of June, according to the latest data compiled by Bloomberg. S&P Global Ratings gives HNA a default probability of about 35 percent within a year.

“They are doing what they can to execute asset sales but they have an enormous amount of debt and they face refinancing risks,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “I haven’t seen any discernible improvements in credit quality that would account for the rally.”

There was no immediate reply from HNA to an emailed request for comment.

S&P’s default probability of about 35 percent is based on HNA’s ccc+ credit assessment for the group and its sample for greater China for the past 17 years, according to Christopher Lee, managing director of corporate ratings.

“We expect the group to face higher funding costs as yields have risen onshore and liquidity is tightening,” said Lee. 

People familiar with the matter said earlier this year that units of the group had missed payments due to several Chinese banks. HNA’s total debt stood at 590 billion yuan as of June 30, the largest ever, according to Bloomberg-compiled data.

While those massive borrowings contributed to concerns that fed into previous bond market declines, those buying into the recent rally have focused on expectations for lender support to help with refinancings.

An HNA unit’s $300 million securities due 2019 gained a record 9.4 cents in February while the group’s 1.3 billion yuan securities due 2019 rose 6.3 yuan, the biggest monthly gains ever, Bloomberg-compiled prices show.

Some investors expect support from authorities to help HNA avoid stumbling.

A default by the conglomerate isn’t likely to be a “base case scenario,” according to Nikko Asset Management Asia Ltd. “We are definitely seeing some support from the government for HNA,” said Ivy Thung, head of credit research at the asset manager. “If the government didn’t want to support, they would have told banks to stop credit lines for the company.”

The progress HNA has made in its asset sale plan has led to better clarity and less panic, according to Steve Wang, a senior credit analyst at Citic CLSA Securities Co. in Hong Kong.

Read more: here is a list of HNA’s $16 billion in asset sales

The group, whose $40 billion acquisition spree since the start of 2016 put it in the cross hairs of the Chinese government, has also been aligning itself more closely with President Xi Jinping-led initiatives. For example, a unit of the group will lead two funds that will invest 20 billion yuan in China’s “One Belt, One Road” initiative.

“These help relieve pressure from the government,”said Glenn Ko, head of Asia desk trading strategy at HSBC Holdings Plc.

The rally in HNA’s shorter-dated dollar bonds such as its 2018 and 2019 securities is sustainable, but the visibility of the group’s business remains low over the longer term, Ko said.

©2018 Bloomberg L.P.

With assistance from Denise Wee, Judy Chen

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