January 18, 2018 / 6:32 AM / a month ago

Exclusive: China's HNA Group, squeezed on cash, looks to turn corner

HAIKOU, China (Reuters) - HNA Group chairman Chen Feng has expressed confidence that China’s aviation-to-financial services conglomerate will manage its cash crunch, and continue to receive support from banks and other financial institutions this year.

The liquidity problem exists “because we made a big number of mergers”, even as the external environment became more challenging and China’s economy “transitioned from rapid to moderate growth”, impacting the group’s access to new financing, Chen told Reuters in a rare meeting.

“Rate hikes by the Federal Reserve and deleveraging in China caused a liquidity shortage at the end of the year for many Chinese enterprises,” Chen said. “We’re confident we’ll move past these difficulties and maintain sustained, healthy and stable development.”

It was a rare acknowledgment by a top company official that HNA is facing financing problems. In recent weeks, local banks have privately and publicly voiced concern after HNA failed to repay some obligations, including aircraft lease payments, and as surging debt drove up the cost of the group’s short-term fund raising to new highs.

Significant moves are expected. HNA’s flagship Hainan Airlines Holding Co (600221.SS), Bohai Capital Holding Co. (000415.SZ), the parent of aircraft leasing firm Avolon, and Tianjin Tianhai Investment (600751.SS), which controls California-based Ingram Micro Electronics, each have suspended trading pending major announcements.

Ingram Micro Inc, which HNA bought for roughly $6 billion, is part of the $50 billion worth of transactions the conglomerate announced over the last two years. They also included big stakes in Hilton Hotels Worldwide Holdings (HLT.N) and Deutsche Bank (DBKGn.DE).

HNA’s chief executive, Adam Tan, said in November that the company was selling some real estate and other assets to improve liquidity and comply with national policy.

Chen, speaking at his office in Haikou, southern China, where HNA Group has its headquarters, said he wasn’t involved in decision making for any transactions and declined to comment on fundraising plans.

GOAL UNCHANGED

After years of “extraordinary development”, Chen said that HNA was now focused more on integrating operations, creating synergies between resources at home and overseas, and improving group management.

“Our business has become so big that we need to improve efficiency,” said Chen. “The long-term goal remains unchanged, which is to become a world-class enterprise,” he said. “2018 is our year of effectiveness.”

HNA’s leverage has alarmed some analysts and its “aggressive financing policy” caused S&P Global Ratings in November to downgrade its assessment of the company’s creditworthiness. HNA in recent weeks also has raised additional financing by selling expensive short-term debt and pledging more of its shares for loans.

Group borrowing, including bank loans and bonds, surged by more than one-third over the first 11 months last year to 637.5 billion yuan ($99.14 billion), according to a China bond market filing. Group assets reached 1.2 trillion yuan at the end of June, according to a separate bond market filing.

In December, HNA said it received pledges of support for 2018 from eight big domestic policy and commercial banks, including China Development Bank [CHDB.UL], The Export and Import Bank of China, and the Industrial and Commercial Bank of China (601398.SS)(1398.HK).

The company also said it still had 310 billion yuan in unused credit facilities from financial institutions.

Chen said that financial institutions continued to support HNA because of the quality of its assets and projects. “We provide local employment, tax revenue and development,” he said.

    PIECE BY PIECE

    HNA’s financing troubles have been exacerbated by regulatory investigations in multiple countries after the group announced changes to its shareholding structure in July. While securing clearances from German, Irish and UK authorities, the group also has experienced setbacks in Switzerland and New Zealand.

    Australia and New Zealand Banking Group (ANZ.AX) this month dropped plans to sell its UDC finance unit to HNA after the New Zealand regulator blocked HNA’s application, citing uncertainty about the group’s ownership and controlling interests.

    “China’s going abroad, change in its foreign exchange policy, and the doubts of foreign governments about China presents challenges,” Chen said. “Some people are uncomfortable.”

    Ownership concerns were also aggravated by “groundless and defamatory” rumors that the company has ties to the family of a high-ranking Communist Party official, which had “some influence on our image and reputation,” Chen said. “Gradually, those problems are being resolved.”

    Chen said that HNA still faces a problem of experience, which has been tested by a complex global environment. “Our young leadership team, including myself, hasn’t managed a global enterprise,” Chen said.

    As challenges multiplied, Chen said it was unreasonable to expect HNA to “fully grasp” the situation at once. He said digesting the group’s acquisitions and integrating operations would “take some time.”

    “So we’re doing it piece by piece,” Chen said.

    ($1 = 6.4300 Chinese yuan renminbi)

    Reporting By Matthew Miller; Editing by Philip McClellan

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