Distressed debt

Credit risks hang over Hainan Airlines

After its defaults last year, creditors could call in $12 billion of debt from Hainan Airlines, the prize asset of Chinese conglomerate HNA Group.
Hainan Airlines has run into turbulence.
Hainan Airlines has run into turbulence.

Although Hainan Airlines has said that it is not in any crisis for now, billions of dollars of credit risk loom over the Shanghai-listed firm. If a crisis were to hit the airline, it would reverberate with its parent HNA Group, a private Chinese conglomerate which is struggling with its own huge debt issues. This will be especially acute, given that HNA chairman Feng Chen has described the airline as HNA’s flagship company.

The Shanghai Stock Exchange queried Hainan Airlines in May on various matters including its credit risks and relationship with HNA.

In its reply, posted on the Shanghai Stock Exchange on Tuesday, Hainan Airlines disclosed that as of May 31, banks and other creditors had the right to call in Rmb84.07 billion ($12.2 billion) of loans, based on covenants affected by the airlines’ default on Rmb7.58 billion of debt last year.

The defaulted debt has since been repaid.

To date, creditors have not called in these loans, but the possibility remains, because the airline has not received any waiver of these debt obligations, it warned.

“Hainan Airlines may have repaid the defaulted debt, but the company is not yet in a secure position. Its parent company will also struggle to support it given its own problems,” Jason Wright, founding managing director of Hong Kong risk consultancy Argo Associates, told FinanceAsia.

In the first five months of the year, Hainan Airlines rescheduled Rmb8.55 billion of debt with various banks. As of March 31, Hainan Airlines’ liquid liabilities exceeded its liquid assets by Rmb68 billion, while it had Rmb38.66 billion of cash.

The airline has Rmb100.79 billion of interest-bearing debt that will mature this year. But, based on its existing funds and external financing channels, Hainan Airlines said it can repay this maturing debt.

To resolve its debt problems, Hainan Airlines and its subsidiary Air Changan sold 16 ageing aircraft for Rmb2.76 billion. It sold another two old jets for $25.8 million and applied for a Rmb5.12 billion loan from Chinese state-owned policy lender China Development Bank, the airline said on Tuesday.

PROBLEM PARENT

The Shanghai Stock Exchange asked Hainan Airlines whether HNA or other related companies have used Hainan Airlines’ funds.

Last year, while HNA was resolving its liquidity crisis, Hainan Airlines lent HNA and its Hong Kong-listed subsidiary CWT International Rmb6.57 billion. This was repaid before April 30, so the effects of the loan have been eliminated. Aside from this loan, Hainan Airlines’ funds have not been touched by HNA or other related companies, the company said.

Hainan Airlines’ temporary loan to CWT International did not prevent the latter from defaulting on its debts in April. This default caused creditors to seize CWT's businesses in logistics and commodity marketing, engineering and financial services, its golf courses in China, as well as properties in the US and UK. All of these assets, representing the “vast majority” of the company’s business, totalled HK$24.6 billion ($3.2 billion). Receivers are now taking steps to dispose of the seized assets.

“What’s key is the ‘contagion effect’ risk – a large company like HNA missing a payment that leads to a financial crisis,” said Dane Chamorro, a Singapore-based partner of international risk consultancy Control Risks.

In a media interview in May, HNA chairman Feng Chen said that the group has not defaulted on any public debt, thereby avoiding incurring systemic financial risk. Last year, the group sold Rmb300 billion of non-core assets, he added. This year, the conglomerate will increase efforts to sell more non-core assets.

HNA’s debts totalled Rmb657.4 billion in the middle of last year, largely due to its splurging an estimated $40 billion on assets all over the world from 2015 to 2017. HNA joins other private Chinese conglomerates like Wanda Group and Anbang Insurance Group which previously splashed billions of dollars acquiring assets in Asia, Europe and North America, only to sell many of them under pressure from the Chinese government which was worried about capital flight.

These three companies have opaque ownership structures, said Chamorro. The problem of insufficient shareholder disclosure is very common in Asia, he added.

“We believe the financial condition of many Chinese companies are worse than what their financial statements indicate, which poses risks to investors,” said Pengyuan International, a Hong Kong-licensed credit rating agency.

Pengyuan International was not referring to any specific company and said an individual company’s problem should not be generalised to all Chinese companies.

 
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