HNA in focus after abandoning Value Partners bid

The aborted bid delivers blow to the acquisitive, debt-heavy Chinese powerhouse after a difficult few weeks in which markets have fretted over its finances.

HNA Group has withdrawn its bid to acquire a majority stake in Hong Kong’s largest hedge fund, Value Partners, dealing a blow to its quest to become one of the world's largest companies as liquidity concerns waft over the highly acquisitive, debt-heavy Chinese conglomerate.

Value Partners, which has a market value of $2 billion, said in a regulatory filing on Thursday that the termination was due to “commercial considerations” among the parties involved, without providing more details.

Neither Value Partners chairman Cheah Cheng Hye nor HNA immediately responded to FinanceAsia's emailed requests for further comment.

The surprise statement from Value Partners contrasts sharply with comments it made last month when it indicated a deal was in the process of being finalised and that the financing and commercial terms were at an advanced stage. 

One source familar with the discussions cautioned against reading too much into HNA's pull-out, citing the Rmb30 billion ($4.62 billion) credit facility HNA secured last month with policy lender Agricultural Development Bank of China. News of that is posted on HNA's official WeChat feed but failed to prevent subsequent swings in the group's bond prices, prompting HNA to issue a further statement on December 15 in which it said it had repurchased some of its bonds, planned to repurchase even more, and declared its finances "stronger than ever". 

“A U-turn on HNA is always possible,” the investor familiar with the acquisition discussions told FinanceAsia on condition of anonymity because he is not allowed to speak to the press. “We need to be careful...not to draw too simplistic a conclusion...given HNA’s background and its appetite for assets around the world.”

Headquartered in the southern coastal island of Hainan, HNA started out as a regional airline in 1993. In the last two years, though, it has spent more than $50 billion on a range of overseas assets including a 9.9% stake in Deutsche Bank and a 25% stake in Hilton Group. It also operates a group of Chinese domestic and foreign airlines, including Hong Kong Airlines and Brazil’s Azul.

HNA has also drawn lots of public attention because of its copious use of debt funding, raising questions about the long-term sustainability of the Chinese group's buying spree.

The airlines-to-finance conglomerate's aggressive financing tactics were underlined during a US dollar debt sale last year, when the unrated group paid a coupon of 8.87% for a $300 million 363-day bond that might cost as little as 5% for other companies with similar credit profiles. 

Officially, HNA reported a debt-to-capitalisation ratio of 51.72% and debt-to-Ebitda ratio of 8.5 times at the end of 2016. It amassed Rmb530.2 billion ($80 billion) of debt for the first half of 2017, up from Rmb441.4 billion at the end of 2016. Its cash and cash equivalents dropped from Rmb172.5 billion to Rmb142.7 billion over the same period, while overall revenue expanded 190% and the net profit was up 45%.

In its December 15 statement, HNA said its debt-to-asset ratio had declined for seven consecutive years, from a high of 82% to 59.5% now.
Too big, connected to fail?

Some in the market speculate whether HNA is now too big to fail, while noting the growing risks. 

“HNA has grown so huge it has become a national interest,” analysts at Bond Critic wrote in a note last year. “Its aggressive acquisitions backed by rising leverage have raised execution as well as refinancing risk.” 

In addition, HNA’s opaque corporate structure has attracted scrutiny from overseas regulators. The Swiss Takeover Board in November said HNA had provided some inaccurate information and failed to disclose how its co-founders controlled a dominant stake during the company's earlier takeover of Zurich-based airline caterer Gategroup. 

This came after Guo Wengui, a fugitive Chinese billionaire living in the United States, accused HNA of being connected to Wang Qishan, China's anti-graft tsar during President Xi Jinping’s first term. HNA vigorously denied that accusation. 

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