HNA Record Bond Rally Has ANZ Saying `Sell' on Debt Pressure

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(Bloomberg) -- HNA Group Co.’s bonds are rebounding as the Chinese conglomerate steps up asset sales. But its debt remains large despite efforts to pay it down, prompting some observers to recommend selling the notes.

HNA and its subsidiaries face record bond repayments in the second half. That puts even more of a focus on the group’s total debt, which rose to at least 637.5 billion yuan ($101 billion) by November, as it releases results as soon as this week. The massive liabilities mean it’s unclear if HNA’s problems are behind it, according to Australia & New Zealand Banking Group Ltd. The group may still have difficulty repaying debt, Bondcritic Ltd. says.

HNA has repeatedly said it’s fine. Many investors have been more willing to believe that after it boosted cash through a string of asset sales spanning hotels, property and a reduction of a stake in Deutsche Bank AG. Sentiment has also improved after Chinese President Xi Jinping recently announced measures to bolster the economy in HNA’s home base of Hainan.

But warnings signs have cropped up. The probability of an HNA default in the coming year touched a 10-month high of 0.6 percent this month, according to the Bloomberg Default Risk model that tracks metrics including share performance, liabilities and cash flow.

Read more about HNA’s missed payments to Chinese banks around New Year

“We recommended that investors buy the offshore bonds a few months ago but given the rally, we think it makes sense to sell the bonds now given the redemption pressure,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

HNA declined to comment on questions on debt redemption pressure.

HNA’s dollar note due in December has jumped 5.2 cents from the end of January, set for the sharpest three-month increase ever. One of the group’s onshore securities has risen 9.5 yuan in the period, also a record.

While HNA has honored all its bonds, the bigger challenge will come in the second half when it must repay a record 26.3 billion yuan of local and international notes. On top of that, investors also have options to sell back 7.5 billion yuan of securities. And while the recent rally has helped trim financing costs, they still aren’t low. The yield on HNA’s onshore bond due December 2019 was at 8.1 percent while the rate on the offshore security was at 10.2 percent.

Still, the asset disposals, which have amounted to more than $13 billion this year, have cheered some observers.

“I have turned positive on HNA,” said Tony Chen, Hong Kong-based credit desk analyst at Nomura Holdings Inc. “The company is on the right track to scale back their exposure in offshore investments.”

HNA’s debt to asset ratio dropped to 48.9 percent as of June 30, 2017, from 66.7 percent a year earlier, according to data compiled by Bloomberg.

Despite the debt-market rally, others remain vigilant.

“It’s too early to say the worst is over for HNA, which still has complicated businesses and high leverage,” said Terence Cheng, deputy general manager and chief investment officer at HuaAn Asset Management (Hong Kong) Ltd.

©2018 Bloomberg L.P.

With assistance from Judy Chen, Denise Wee

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