HNA Group, one of the most acquisitive Chinese conglomerates, was out in the international bond markets on Thursday with one of the most eye-catching deals of the year (for the wrong reasons).
The group, which has been subject to intense speculation about its shareholder structure and the strength of its political backing, initially marketed a capped $300 million 363-day note around the 9% mark, before fixing the coupon at 8.875% according to a term sheet seen by FinanceAsia.
The unrated deal’s extremely high coupon contrasts sharply with the current trading level of single-B rated Asian high yield credits, which range from the high 5% to mid 7% level for five-year paper.
“You don’t get something for nothing,” one Singapore-based fund manager told FinanceAsia. “Investors really need to think carefully about the underlying and potential risks they face for a 9% return over a one-year maturity.”
The ultra short-dated structure means HNA has been able to use a regulatory loophole to bypass the National Development Reform Commission, which has been tightening its grip over overseas debt issuance. So far this year, at least 22 companies have raised $4.35 billion from short-dated notes that do not require approval, up significantly from $90 million via two deals over the whole of 2016, according to Dealogic data.
HNA is already been one of that number since group company Hainan Airlines raised $300 million from a 363-day note with a 6.35% coupon in June.
HNA’s own short-dated debt has been spiking sharply. Its 4.5% August 2018 bond was bid at 8.194% yield-to-worst on Thursday and its 8.125% December 2018 bond at 8.736% yield-to-worst.
Why have its debt costs been rising?
At the heart of concerns about HNA’s leverage is a $40 billion buying binge that has transformed the group, in just a few short years, from a provincial airlines operator to a sprawling conglomerate whose assets include a 25% stake in Hilton Hotels to the biggest individual shareholding in Deutsche Bank.
Officially, the group reported a debt-to-capitalisation ratio of 51.72% and debt to Ebitda ratio of 8.5 times at the end of 2016.
According to the marketing materials for its bond deal, it then reported debt of Rmb530.2 billion ($80.23 billion) 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 net profit was up 45%.
However, last month the Hong Kong Monetary Authority reportedly asked banks to provide details of all outstanding loans to HNA group companies. Investors worry what happens if they are told to turn the funding tap off.
Yet for many investors, the main credit consideration where China is concerned is not financial but key man risk. This is never easy to untangle in a country where the vicissitudes of political favour remain opaque at best.
As such, investors have been raising many questions about HNA’s complex corporate structure and its ultimate controlling shareholder. In an unusual move, the privately held group unveiled its shareholding structure in July, when it revealed that more than half of the HNA’s shares had been handed over to its domestic and international charities, according to the disclosure.
The group is currently suing US-based businessman, Guo Wengui, who has alleged it has secret ties to the family of a Communist party official who until recently held a very high rank.
Bookrunners for the bond deal were CCB, CICC, Citic CLSA and Guotai Junan, with AMTD, Hong Kong International Securities, GPB Securities and Mizuho on joint books.