China’s HNA Keeps Striking Foreign Deals as Banks Wince and Investors Flee
Posted December 14, 2017 7:19 p.m. EST
HONG KONG — With some investors in its bonds running for the exits and foreign banks increasingly skeptical about its prospects, HNA Group tried this week to reassure markets that it has access to the money it needs.
At the same time, HNA, a vast but troubled Chinese conglomerate, is continuing the drive that helped cause its difficulties in the first place: completing billions of dollars in foreign deals.
The competing efforts by a company that has symbolized China’s growing wealth and global ambitions are a problem for the country’s leaders. They want to end wasteful overseas spending by debt-laden Chinese companies, which in the case of HNA and some others have drawn growing regulatory scrutiny in the United States and Europe.
China has yet to let one of its big conglomerates fail, and HNA is unlikely to be an exception. But it is testing how effectively China can curb such behavior, and how the country may deal with some companies that have gone too far.
HNA said late Wednesday it had talked to eight Chinese banks, including powerful and politically connected lenders like China Development Bank and China Construction Bank, about extending the conglomerate’s credit lines next year. HNA said several of the banks planned to increase the amount of money it could borrow if needed.
Bank officials believe “HNA is the best-quality client of banks,” according to a statement posted on HNA’s website. An HNA spokesman said the company had no further comment.
HNA made the disclosure as its problems continued to mount.
The company’s publicly traded bonds have fallen in recent days as worries grew among global investors about the challenges it faces. The bonds’ declining value makes it more expensive for HNA to borrow, which analysts say the company must do to meet its obligations. It owes at least $21 billion to bondholders overseas and $16 billion in syndicated loans from banks, according to data from the data provider Dealogic.
“The situation is a lot worse now,” said Chung Yuh Ang, a senior fixed-income analyst at iFast Corp., an online investment platform. “HNA is only able to pay its old debts by taking new ones.”
Foreign banks have already grown wary of working with HNA. Goldman Sachs and Bank of America Merrill Lynch have stopped doing business with the company, while HSBC bankers have shared concerns among themselves about HNA’s acquisition binge and its ownership structure, according to internal documents and people with direct knowledge of the firms.
Despite the banks’ hesitation and growing skepticism on the part of officials in China, Europe and the United States, HNA is moving ahead on completing deals it has struck this year. It announced $12 billion worth of deals in 2017, $3 billion of which are pending, according to Dealogic. In recent months, HNA units have agreed to pay $300 million for a refrigerator-logistics business owned by Automotive Holdings Group and $1 billion for CWT, a Singaporean logistics operator.
After a buying spree that began two years ago, HNA now has operations in countries from Germany to Australia, and in cities like Hong Kong, London and New York. People around the world take money from a financial institution it partially owns, fly on its planes and sleep in its hotels.
In many instances, HNA has paid dearly for its acquisitions.
“HNA has bought things at clearly high prices,” said Gordon Orr, the former Asia chairman at global management consulting firm McKinsey & Co. “The auctions they won haven’t been by a dollar but by miles.”
Beijing officials warned this summer that HNA and other private Chinese companies spending big money abroad — known locally as “gray rhinoceroses” — were threatening the country’s economic stability.
Many of HNA’s peers got the message. Dalian Wanda, a once-mighty real estate and entertainment conglomerate, has sold many of its assets to pay off its debt. The chairman of Anbang Insurance, which famously swooped in to buy the Waldorf Astoria hotel in New York and tried to strike deals with the family of President Donald Trump’s son-in-law, was detained.
At a news media event in Beijing on Nov. 28, HNA’s chief executive, Adam Tan, discussed the possibility that the company would sell some assets, like those related to real estate, which do not fall under the most strategically important investments recently outlined by President Xi Jinping.
“We will not invest in anything the government does not support,” Tan said at the event, which was hosted by Caijing Magazine.
HNA is nonetheless pressing to complete its pending deals, even as regulators from Washington to Brussels to Switzerland grow increasingly skeptical.
A lawsuit filed last week in a New York state court by Ness Technologies, a company that HNA tried to acquire, accused the Chinese company of dooming the deal by not trying hard enough to address questions from officials at the Committee on Foreign Investment in the United States, a group that scrutinizes foreign purchases of domestic companies. HNA’s ownership structure attracted a number of questions from committee officials, the suit says, but the company’s answers undermined its credibility.
In a statement, HNA said it “believes this lawsuit is baseless and without merit, and we will vigorously defend against it.”
Another HNA deal, to acquire an investment firm called SkyBridge Capital, has missed self-imposed deadlines amid scrutiny from U.S. takeover officials. The deal drew attention because HNA would be buying SkyBridge from Anthony Scaramucci, a former White House adviser who did not take a position as a Trump administration liaison to the business community amid close examination of the deal.
Guang Yang, the chief executive of HNA Capital, the subsidiary that has agreed to buy SkyBridge, said the firm was “committed to closing the transaction with SkyBridge as soon as possible.” In Germany, HNA’s proposed acquisition of shares in Deutsche Bank, a major global lender, has drawn questions. The European Central Bank is considering opening an inquiry into whether HNA is a qualified owner of its 10 percent stake in Deutsche Bank, according to a person with knowledge of the procedure who was not authorized to discuss it publicly. The central bank has the authority to examine an investor if it appears that the investor could exert significant influence over management.
Germany’s financial markets watchdog, BaFin, is also examining whether HNA fulfilled its reporting requirements as it increased its stake in the bank, according to someone with direct knowledge of the matter. Deutsche Bank, the ECB and BaFin declined to comment.
A Swiss regulator has gone a step further than its counterparts in Germany and the United States.
Last month, the Swiss Takeover Board cited HNA for providing false information about its complicated share structure when it acquired Gategroup Holding, a Swiss airline catering and logistics company.
The Swiss regulator’s investigation began after HNA said the stake had been transferred to a charitable trust amid questions about one of its biggest shareholders.
Although the Swiss takeover board has no enforcement powers, it asked Ernst & Young to conduct a further inquiry, which could lead to litigation in the future.
“We cooperated fully with the Swiss Takeover Board’s inquiry,” HNA said in a statement, adding that it would “respect its authority in this matter.”