HNA’s Fire Sale Isn’t Offering Any Bargains

(Bloomberg Opinion) -- At HNA Group Co., everything must go. But peer through the noise, and it looks like this distressed seller isn’t offering bargain-basement prices.

The Chinese conglomerate remains mired in chaos and confusion after its co-chairman died suddenly. The billions of dollars of assets it accumulated since early 2015 are, in theory, up for sale to service its heavy debt burden into the end of this year. HNA has parted with some $20 billion of its jewels so far, but it’s not looking like a fire sale yet.

On Wednesday, Bloomberg News reported the embattled group agreed to sell a 30 percent stake in aircraft lessor Avolon Holdings Ltd. to Japanese financial group Orix Corp. for $2.2 billion. The deal will be completed in November.

HNA’s Fire Sale Isn’t Offering Any Bargains

That leaves HNA well in the money. Its majority-owned Bohai Leasing Co. originally bought Avolon for an enterprise value of $7.6 billion in January 2016, before adding CIT Group Inc.'s commercial leasing arm for a further $10 billion and a portfolio of aircraft from General Electric Co. for $2 billion later that year. Net out the debt that financed those acquisitions and other liabilities and Avolon had $7.3 billion in equity at the end of December, which would put a 30 percent stake valued at $2.2 billion bang on book value. Orix may be shopping in a clearance sale, but it’s not getting any discounts.

HNA managed a similar feat with the sale of a 20 percent stake in Hainan Airlines Holding Co. to a consortium including Temasek Holdings Pte. in June for $1.1 billion, as my colleague David Fickling explained here. It has shed real-estate assets bought at sky-high premiums, yet made money from those too. The group sold down its stake in hotel chain Hilton Worldwide Holdings Inc. earlier this year  at a chunky premium. It also pared – or was perhaps forced to pare – an almost 10 percent stake in Deutsche Bank AG down to around 7.9 percent.

Spot a pattern? First to go are the stakes in highly liquid businesses with prized positions. Next up, cash cows that can no longer be milked. Avolon is an example of the latter: To protect nervous creditors, it amended its bond agreement earlier this year by adding a mandatory redemption covenant that effectively caps the amount Bohai Leasing can extract from the company in the form of shareholder distributions when leverage rises.

The latest transaction goes still further, giving Orix veto rights over Avolon’s cash, dividends and budgets, two directors on Avolon’s seven-person board, and still greater informal influence: While the purchase involves a minority stake it will effectively be run as an equal partnership, Domhnal Slattery, Avolon’s chief executive officer, told Bloomberg TV in an interview Wednesday.

HNA’s Fire Sale Isn’t Offering Any Bargains

Key to HNA’s strategy has been its ability to put a floor on valuations and bring in other investors. For that, it has found a friend in RRJ Capital, run by Goldman Sachs Group Inc. alumnus Richard Ong. His involvement may also point to clues for the next disposal.

The private equity firm has invested $1.8 billion in HNA-related deals. Investors like Ong, it’s safe to say, aren’t motivated by altruism – significant returns have to be on the table at the right price. Earlier this year, RRJ bought $1.3 billion in entities partly owned by HNA, Bloomberg News’s Cathy Chan reported, in the form of preference shares that convert to minority stakes in two special purpose vehicles. One SPV owns Avolon, the other Ingram Micro Inc., the U.S. electronics distributor that HNA bought for $6.1 billion in early 2016. RRJ also used hybrid instruments to take a position in Gategroup Holding AG, another privately held HNA entity. 

Here’s how it broadly works: If RRJ’s preference shares have put options with a five-year time horizon attached to them (as is customary), then it can get out at an attractive valuation at a future date, a few turns higher than the price at which it entered. Those returns could be higher if it leverages the money it’s putting in. 

Typically, there’s also a minimum internal rate of return that has to be met, plus a penalty in the form of interest-like costs if HNA sells below a certain valuation. Getting good valuations for asset sales isn’t easy for companies in HNA’s position, so the prospect of yet more interest-style payments is a useful motivator. The fact that Avolon appears to be changing hands at close to book value suggests it’s working. 

Next on the chopping block is likely to be Ingram Micro. Through its debt agreements, Ingram has walled itself off from its parent, so it will be hard for HNA to tap that particular investment for more cash. But with a little help from RRJ and a dash of financial engineering, HNA has bought time to find a way to raise money from that asset, too. 

In its short life, HNA hasn’t been used to acting with a lot of discipline – but it’s learning, fast. If it can keep walking this line, it won’t be selling at deep discounts any time soon.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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