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HNA Bond Euphoria Cools as Market Weighs State Takeover Talk

HNA Bonds Soar on Talks of State Takeover of Debt-Laden Group

(Bloomberg) --

A remarkable rally in dollar bonds of Chinese conglomerate HNA Group Co. eased slightly Friday, as investors awaited confirmation of reported plans of a government seizure of the embattled firm. Once the poster child for China’s debt-fueled overseas acquisition spree, HNA could now find itself a takeover target of Beijing, a plan that may involve the sale of its lucrative airline assets in an effort to limit the economic damage of the coronavirus.

What’s happening:

The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the firm which is struggling to balance its debt load as a result of the deadly virus, according to people familiar with the plans.

The group’s dollar bond due 2021 fell 0.7 cents on the dollar Friday morning, after nearing a seven-month high of 75.7 cents on the news Thursday, according to Bloomberg-compiled data. It earlier gained as much as 6.4 cents, the most in more than two years.

Under the emerging plan, China would sell the bulk of HNA’s airline assets to the country’s three major state carriers, according to the people, adding discussions with the airlines are continuing.

Businesses across China have been crippled by the outbreak, with the tourism and airline industries among the hardest hit as huge swathes of the country remain on lock down. While authorities have introduced measures to ease the economic impact of the virus, an intervention by the Hainan government would be the most dramatic step by the state to support firms during the crisis thus far.

HNA has periodically been in the news in recent years for missing repayments, selling assets and struggling with debts that once climbed to nearly 600 billion yuan ($85 billion). In September, an airport backed by HNA units, Haikou Meilan International Airport, failed to make good on a $200 million bond due September.

Further signs of stress emerged late last year with the near-collapse of HNA-backed Hong Kong Airlines Ltd. which narrowly avoided losing its license to fly and the group suspended a bond because of an unspecified “major” event.

Why does it matter:

HNA remains one of China’s biggest conglomerates: It had total assets of about $140 billion and liabilities of $101 billion during its latest semi-annual financial report as of mid-2019 — meaning the group has the scale to roil Chinese markets. Intervention by the government to prevent a financial crisis at the firm would be the strongest signal yet of Beijing’s desire to curb the economic fallout of the virus.

What do analysts say:

“For bondholders, it is a double-edged sword. While government backing of a defaulting company provides some financial support, it also could result in the rapid fire, forced recapitalizations at low valuations,” said Andrew Collier, managing director at Orient Capital Research. “We are in uncharted territory here.”

“There’s huge uncertainty regarding whether creditors will see 100% repayment,” said Li Yuze, a fixed-income analyst at China Merchants Securities Co. Given the virus has already dealt a huge blow to HNA’s financial condition, the market will likely expect a better recovery ratio if the firm is taken over by the government, he added.

A takeover is credit and spread positive for HNA, according to Warut Promboon, managing partner at credit research firm Bondcritic Ltd. “It tells us the Chinese government will still pick and choose who to rescue.”

As of June, HNA held an AAA rating from local ratings firm Shanghai Brilliance Credit Rating & Investors Service Co. The group is not rated by the major international ratings companies.

What’s the company:

The group shot to prominence between 2016 and 2017 after spending more than $40 billion on acquisitions across six continents. The once little-known airline operator became the biggest shareholder of iconic companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG as well as paying top dollar for high-end properties from Manhattan to Hong Kong.

The buying spree attracted regulatory scrutiny on things such as its opaque ownership structure. Eventually, its spiraling debt caught up with the group and prompted an equally dramatic selling spree. On top of that, the group’s co-chairman suddenly died in 2018, exacerbating the conglomerate’s crisis.

Once among the most ambitious and acquisitive Chinese private firms, HNA has since come under pressure from Beijing to sell off assets amid concerns that the group’s borrowing spree could pose a systemic risk to the nation’s economy.

In an attempt to improve its financial situation, HNA has been looking to divest its assets including plane lessor Avolon Holdings Ltd., which is worth about $8.5 billion, as well as Swiss aircraft-maintenance firm SR Technics and container-leasing business Seaco, people familiar with the matter have said.

What traders are watching for next:

Investors will be watching how plans for any government takeover and asset disposal proceed, as well as the ability of the group to service its upcoming debt.

The group and its units have to service about 4.1 billion yuan in local and offshore bonds in 2020, according to data compiled by Bloomberg. This includes two bonds maturing in March, a S$100 million bond and 1 billion yuan note.

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To contact Bloomberg News staff for this story: Rebecca Choong Wilkins in Hong Kong at rchoongwilki@bloomberg.net;Tongjian Dong in Shanghai at tdong28@bloomberg.net;Qingqi She in Shanghai at qshe@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Shen Hong, Chan Tien Hin

©2020 Bloomberg L.P.

With assistance from Bloomberg