China nears takeover of HNA Group as coronavirus hits business

BEIJING (BLOOMBERG) – China plans to take over indebted conglomerate HNA Group and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from the deadly coronavirus outbreak.

The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations, according to people familiar with the plans.

The once little-known airline operator shot to prominence between 2016 and 2017 after a debt-fueled acquisition spree saw it become the leading shareholder of iconic companies such as Hilton Worldwide Holdings and Deutsche Bank, while paying top dollar for properties from Manhattan to Hong Kong.

China is under growing strain from the shutdowns imposed to curb the coronavirus, which has killed more than 2,000 people. As President Xi Jinping seeks to prevent the short-term economic pain from turning into a slump that outlasts the contagion, his government is considering direct cash infusions or mergers to stabilize the hobbled airline industry, while the People’s Bank of China said it will work on supporting domestic consumption. A takeover of a high-profile company like HNA would take those efforts to a new level.

An announcement could be made as soon as Thursday (Feb 20), though talks could drag on or fall apart, the people said, asking not to be identified as the discussions are confidential. Under the emerging plan, China would sell the bulk of HNA’s airline assets to the country’s three biggest carriers – Air China, China Southern Airlines and China Eastern Airlines, according to the people. Discussions with the airlines are continuing, they said.

A representative for HNA declined to comment. Calls and messages to Hainan government officials and press officers at the three state-run airlines weren’t immediately returned after regular business hours in China.

HNA has been slimming down after a US$40 billion (S$55.8 billion) buying binge left it with one of the highest levels of corporate debt in China. In the past year, the group has been returning to its aviation roots, culminating in a November announcement to divide its businesses into airlines, aviation leasing and airports, with the rest being lumped under its “non-aviation asset management” unit. But its focus on aviation and tourism backfired as the virus epidemic led to an unprecedented drop in flights in and out of China.

“HNA is, even by Chinese standards, a sprawling and indebted conglomerate, and the collapse in Chinese airline activity due to the outbreak of Covid-19 has apparently pushed it to effective bankruptcy,” London-based Agency Partners analysts led by Nick Cunningham wrote in a note after Bloomberg’s report.

HNA has for years been struggling with debts that once climbed to almost 600 billion yuan (S$119.5 billion) as well as soaring borrowing costs. While its total debt fell to 525.6 billion yuan as of mid-2019, its cash pile shrank at a much faster pace, to 50.4 billion yuan, the smallest amount based on semiannual figures stretching back to 2015. Chairman Chen Feng closed 2019 by predicting that this year would be “the decisive year to win the war” against the conglomerate’s long-running liquidity challenges.

In an attempt to stabilize the financial situation, HNA has been looking to divest assets including plane lessor Avolon Holdings, which is worth about US$8.5 billion, as well as Swiss aircraft-maintenance firm SR Technics and container-leasing business Seaco, people familiar with the matter have said.

China’s economy was likely running at just 40-50 per cent capacity last week, according to a Bloomberg Economics report, after efforts to contain the epidemic closed stores, brought factories to a halt and triggered a virtual shutdown of the airline industry. Employers have encouraged people to stay home, shopping malls and restaurants are empty, and amusement parks and theaters are closed.

The impact on business has been spreading around the world, disrupting supply chains of the world’s largest carmakers and hitting sales at companies from Apple to Burberry Group and Nike. Apple this week said it doesn’t expect to meet its revenue outlook this quarter, joining the growing number of global corporations that either warned about a financial hit or scrapped their forecasts altogether.

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