Once High-Flying HNA Group Enters Bankruptcy Proceedings

Once High-Flying HNA Group Enters Bankruptcy Proceedings
The HNA logo is seen on a building in Beijing on Feb. 18, 2016. (Greg Baker/AFP via Getty Images)
Fan Yu
News Analysis

HNA Group, the acquisitive conglomerate once synonymous with China’s global ambitions, has succumbed to its massive debt load and entered bankruptcy proceedings at the behest of its creditors.

The Hainan-based company was served by its creditors on Jan. 29 in the provincial court to begin bankruptcy restructuring, the company announced on its WeChat board. Previously, a government-led effort to restructure its debts failed to sufficiently repay HNA’s creditors.

It’s been a precipitous fall for one of China’s highest-profile conglomerates. HNA was established by Chen Feng, who worked for the civil aviation authority before starting Hainan Airlines, the flag airline of the southern-most province in China and the crown jewel of HNA’s assets.

HNA gorged on debt and bank loans to fund its overseas asset purchases. At one point in 2017, the firm owned a sprawling portfolio of global assets, including a 25 percent stake in Hilton Hotels & Resorts, a 10 percent stake in German banking giant Deutsche Bank AG, CIT Group’s aircraft leasing arm, and California-based technology provider Ingram Micro. The company also counted financier George Soros as its largest foreign shareholder.

The acquisition spree ended in 2017 when Beijing’s financial regulators cracked down on foreign acquisitions to stop capital flight out of China and protect its capital reserves. The timing of this roughly coincided with President Donald Trump’s escalating trade dispute with China.

A group of companies including HNA, Anbang Insurance Group, Fosun Group, and Dalian Wanda Group came under intense scrutiny. In their heyday, these Chinese companies frequently outbid corporations and private equity firms in M&A auctions. But their acquisitive nature ended abruptly in 2017, when the risky insurer-turned-asset manager Anbang—famous for its takeover of the Waldorf Astoria hotel in New York—was itself taken over by Chinese Community Party regulators and Chairman Wu Xiaohui was imprisoned on fraud and embezzlement charges.

Unloading Assets Since 2018

The China Development Bank (CDB) had been tasked with supervising HNA Group’s asset disposals since 2018. At its end state, HNA is expected to hold a portfolio of core assets anchored by its original business, Hainan Airlines.

The company’s ongoing restructuring has been made more complicated due to the ongoing CCP virus pandemic. The associated travel bans and fewer Chinese going on vacations—Hainan is a popular vacation destination—has devastated Hainan Airlines’ fortunes. CDB and the restructuring managers were unable to come up with sufficient funding to adequately satisfy creditors, resulting in the recent bankruptcy announcement.

HNA sold its 10 percent stake in Deutsche Bank in 2018, several hotel and office buildings around the world including Radisson Holdings, and aircraft leasing companies. Most recently in December, HNA sold Ingram Micro to private equity firm Ingram Holdings for more than $7 billion.

HNA and other conglomerates have been speculated to be conduits for CCP officials to circumvent China’s capital controls to funnel money abroad on behalf of top party officials. Companies such as HNA owned illiquid assets abroad—such as hotels, real estate, and other businesses—yet were thinly capitalized and had little liquidity to service their high debt load.

They also have complex and opaque entity structures, seemingly to disguise the true origins of ownership. Until recently, HNA’s ownership structure is a complex web of cascading investment trusts, provincial and local government agencies, and small-business ventures. Thirteen individuals ultimately controlled 76 percent of the company through intermediary companies, while some of the upper-tier entities are registered with addresses of obscure, insignificant apartment buildings or small businesses.

HNA’s Chen Feng, specifically, has been in the regulators’ crosshairs recently. Late last year, he was barred from taking flights or going on vacation, according to a court order in Beijing. He also was banned from engaging in any luxury spending such as staying at star-rated hotels, going to nightclubs or golf clubs, or buying luxury real estate. His children were prohibited from attending private schools.

More critically, he was left out of senior leadership at the company he founded. The nine-member Communist Party committee that operates HNA as a de facto board of directors left out his name, according to a Jan. 21 report by the South China Morning Post.

That’s the clearest indication that the 68-year-old entrepreneur has been stripped of power at the company he founded.

Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
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