HNA Borrowing Costs Surge to Record, Top All Asian Companies

(Bloomberg) -- HNA Group Co.’s interest expenses surged to a record last year, topping all other non-financial companies in Asia and illustrating why the once-acquisitive Chinese conglomerate had to dump more than $13 billion of assets in the past four months.

Borrowing costs surged to 32.1 billion yuan ($5.1 billion) in 2017 from 20.2 billion yuan a year earlier, according to figures derived from an annual report released Friday. Earnings before interest and taxes rose too but not enough to cover the payments -- a rarity for a non-financial company with assets of over $100 billion. Total debt jumped 21 percent to 598.2 billion yuan, or about $94 billion.

HNA Borrowing Costs Surge to Record, Top All Asian Companies

The report provides 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 put up more than $7 billion in real estate and stock for sale, according to a Bloomberg tally.

HNA Borrowing Costs Surge to Record, Top All Asian Companies

The disposals have been emblematic of China’s sudden loss of appetite for foreign trophy assets. HNA and other acquisitive Chinese 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.

Yet the reversal of HNA’s empire-building ways has stood out. In the face of a liquidity crunch, HNA was said to have told Chinese lenders early this year that it planned to sell about $16 billion in assets during the first half of 2018. The group is on its way, having disposed of $13 billion this year, with the biggest being the $6 billion sale of its Hilton Worldwide stake.

The disposals have helped improve investor sentiment on HNA. Some of the conglomerate’s bonds -- including a dollar-denominated one due in December and a local note due next year -- are headed for their sharpest three-month increases ever. 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.

Yet challenges abound. 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, and the group faces record bond repayments in the second half. Analysts at Bondcritic Ltd. and Australia & New Zealand Banking Group Ltd. have recently said that it’s unclear whether HNA’s problems are behind it.

Short-term debts climbed 25 percent last year to 192.6 billion yuan. That exceeded what HNA’s cash and earnings could cover, illustrating the urgency of its liquidity needs. While this year’s asset sales give HNA some breathing room, the company still faces the challenge of regaining the trust of its lenders to help bring down borrowing costs.

HNA Borrowing Costs Surge to Record, Top All Asian Companies

Total debt amounted to about 20 times the company’s Ebit, while net income was only 0.2 percent of assets. Those ratios ranked the Chinese group among the worst globally for non-financial companies of its size, while interest expenses ranked No. 1 in Asia, according to data compiled by Bloomberg as of Friday.

Other figures include:

In billions of yuan20172016
Total Assets1,231.91,015.5
Total Liabilities  736.5  603.5
Total Equity  495.4  412.0
Net Revenue  592.2  193.9
Ebit   29.6   16.0
Net income    2.6    1.5

©2018 Bloomberg L.P.