The ascent of HNA, an aviation-to-financing giant, began on six wings and a prayer.
It started out as Hainan Airlines, set up on China's southern palm-fringed island in 1993 with three planes, in a joint venture between a Buddhist businessman, Chen Feng, and the local government of Hainan. In 2000 the firm became HNA Group and, from a Buddha-shaped headquarters, Chen built his enterprise into an empire with more than $150 billion in assets.
Foreign trophies came next. The firm borrowed heavily to finance deals worth $50 billion since 2015 over six continents, including its 2016 purchase of Minnetonka-based Carlson Rezidor Hotel Group, a 25 percent stake in the Hilton hotel group and 9.92 percent of Deutsche Bank.
In recent weeks it has become clear that its gorging — which had continued apace even after HNA was among those firms singled out for scrutiny by China's banking regulator last June for their risky debt-fueled purchases — is over. In January, HNA told creditors that it would face a probable cash shortfall of at least 15 billion yuan ($2.4 billion) in the first quarter of this year.
'A classic case of overextending'
HNA has assured investors that this is a routine year-end squeeze. But more worrying reports have trickled out, such as of banks briefly suspending unused credit lines to HNA affiliates after missed payments. In the past two months, nearly half of HNA's 16 units listed in China have suspended their shares from trading after steep falls. In four cases, more than 50 percent of the shares are pledged to lenders.
The group has an estimated 43 billion yuan in bond repayments due this year and next. Partly to meet this obligation it is reportedly hoping to sell around 100 billion yuan of assets over the next six months, including offices in New York and London and resorts in French Polynesia.
It will list Swissport, the world's biggest airport-servicing company, which it bought in 2015. But shedding assets will not necessarily mean a cash windfall. It snapped up many of its assets abroad by pledging shares in target companies as collateral, meaning that most sale proceeds would go to creditors.
Analysts had foreseen an unraveling for some time, before even the regulatory wrist-slapping. A Chinese business expert calls HNA's empire-building "a classic case of overextending." For five years it has only been able to service its debts by taking on new ones. Returns on its investments have not exceeded 2 percent in almost a decade, according to calculations by Bloomberg, a data provider. As a result, HNA's ratio of debt to earnings before interest, depreciation and amortization is around a lofty 10, estimates Standard & Poor's, a ratings agency. Bond investors have grown nervous, and the firm's financing costs have soared.
HNA is not alone in facing severe headwinds. Several peers were also chastised for their own spree of foreign purchases, as regulators clamped down on outflows. Dalian Wanda, a property developer that is building an entertainment business, was forced to dispose of most of its tourism and theme-park assets to rivals in a 63 billion-yuan fire sale, the biggest property deal in China's modern corporate history. This week it agreed to sell shares worth 7.8 billion yuan in its domestic cinema and film-production business to Alibaba. That swift divestment has given it more of a cushion than HNA, which has so far announced only one big property sale in Australia, two months after a promise to shed investments.
State-owned banks pledge support
Still, few think the firm will be left to flounder. Political connections are thought to help explain why HNA dodged the more severe restraints placed on its peers: its founder has not been called in for questioning, unlike those of both Fosun, an industrial conglomerate, and Anbang, an insurance firm (whose boss has not reappeared since his detention in June). Last year an allegation surfaced that one of its shareholders was a relative of Wang Qishan, who led an anti-corruption campaign until last year (HNA denies this).
As recently as December, eight big state-owned banks publicly pledged their support for HNA. A longtime observer of China said that the lenders must trust that the company still has some worthwhile ties to the Communist Party to do so. Chen was invited to attend a promotional event for Hainan Province last week, alongside China's foreign minister.
Some muse on the possibility of a more profound restructuring — a government-sponsored decision to hand its aviation empire to one of China's national carriers, perhaps. The most likely outcome for now is that HNA is forced to sell a string of easy-to-offload assets to domestic buyers, in areas such as transport and logistics, as Wanda did last year.
Chen's ambition, to propel HNA into the ten biggest firms in the ranking of Fortune 500 companies by 2025, seems a faint prospect.