Developers help HNA dodge a Kai Tak heart attack ... for now

Ailing Chinese conglomerate manages to turn an unlikely profit from Hong Kong sites that it paid record sums for in 2016. Its woes are far from over, however.

For years, Hong Kong-bound passengers reported a moment of panic when, moments from landing, their aircraft lurched dramatically to the right before hitting the tarmac.

This manoeuvre – necessitated by mountains near the old airport in Kowloon – was dubbed the "Kai Tak heart attack".

That feeling of plunging, lurching then suddenly feeling some reassurance may well be familiar to anyone following China's struggling HNA Group. The company on Tuesday announced it had sold two plots of land at the old Kai Tak airport to Hong Kong developer Henderson Land for almost $2 billion.

But HNA's challenges are far from over. Rather than an easy ride to the terminal, investors face more turbulence ahead.

On paper, the land sale represents a small profit for HNA, which paid $3.5 billion for four Kai Tak sites in 2016. According to a source familiar with HNA's thinking, the deal with tycoon Lee Shau-kee's listed developer came after discussions about the site with China's Evergrande and Jinmao, as well as talks over a loan with Sun Hung Kai Properties.

But the deal – which came only days after the group insisted it would press ahead with the Kai Tak development under its own steam – underline deep fundraising challenges the company faces as it seeks to pay down debt from a massive global acquisition splurge.

HNA must repay Rmb65 billion ($10.24 billion) of bonds and loans this quarter, and the company aims to raise Rmb100 billion from asset sales during the first half of the year, according to a person familiar with the company's plans.

“HNA will have to sell more assets–including the remaining two plots in Kai Tak–in the near future to deleverage and reduce expensive interest costs,” Warnut Promboon, managing director at independent credit research firm Bondcritic, told FinanceAsia.

In November last year, the unrated group, which has been subject to immense speculation about its obtuse shareholder structure and its political ties, sold a $300 million bond paying a yield of almost 9% –  an extremely high coupon rate for a single-B rated company, which was trading at 5% to 7% at that time.

Within a few years, the group went from being a small regional airline in China's southern tourist island of Hainan to become a Fortune 500 company, with stakes in Deutsche Bank and Hilton, sealing a slew of deals in overseas markets. Officially, the group owed more than Rmb530.2 billion as of June last year, while its cash and cash equivalents were about Rmb172.5 billion.

However since the fourth quarter of last year, mainland banks – including commercial banks and state-owned lenders – have gone public with their concerns after HNA affiliates failed to pay debts, including aircraft leasing payments.

Export-Import Bank of China, a policy lender and long-term backer of the company, has formed a team to handle liquidity issues at the group, while China Development Bank, another policy bank, said it was ready to help HNA as no one wanted to see it collapse.

As Promboon put it: “HNA has grown so huge so it becomes a national interest.”

Publicly, the company has been at pains to present a bullish outlook. As recently as Friday, it issued a press release proudly announcing it was making a $9 million interest payment on its 2019 bonds 11 days early, to avoid disruption from the Chinese New Year Holiday. Likewise in December, HNA announced it had taken advantage of "market fluctuations" to repurchase "some" of its bonds – without putting a figure on it.

On this occasion, the same person familiar with the company's thinking stressed it had made a profit on the transaction of roughly HK$1.7 billion.

“There was a list of property companies in the bidding process, including Jinmao and Evergrande as well as a few small local developers,” the person, who was granted anonymity as he is not authorised to speak to the media, told FinanceAsia.

Yet as Promboon pointed out, developing the land would have been far more lucrative given Hong Kong's seemingly endless property boom.

“If the land parcels are developed properly, HNA can generate a higher return than a mere 12% of gross profit from the disposal, in my own estimate,” he said.

HNA faces more difficult choices ahead after spending some $50 billion on acquisitions over the last the years.

The Chinese conglomerate bought about $14 billion of property worldwide, including a New York skyscraper it acquired for $2.2 billion just last year.

According to media reports, HNA has reportedly considered selling the New York skyscraper for $4 billion, as well as its commercial properties in Chicago and San Francisco.

And HNA is far from the only Chinese buyer looking to roll back on expensive acquisitions.

Anbang Insurance Group is reportedly to be mulling a sale of the Waldorf Astoria in New York, which it bought for $2 billion in 2015, to its original owner, the Blackstone Group. 

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