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China debt crunch

HNA Group units seek repayment of funds siphoned off by parent

Three companies' plans are another step toward restructuring of conglomerate

HNA Group revealed on Jan. 29 that its creditors had filed a petition with the Hainan Province High People's Court to reorganize the conglomerate.   © Reuters

HONG KONG -- The three listed HNA Group companies that last month reported irregular outflows of substantial amounts of cash have unveiled blueprints to reclaim what they say was taken by their parent and its affiliates.

Hainan Airlines Group, HNA Infrastructure Investment Group and CCOOP Group separately announced on Tuesday that they have formulated specific plans to seek redress from the former highflying conglomerate and its subsidiaries.

The trio of companies revealed a different combination of financial arrangements -- including transferring debts to the parent, converting capital reserve into shares, and nullifying responsibilities to fulfill financial guarantees that previously had been undisclosed to shareholders.

The three disclosed on Jan. 29, hours after HNA Group's startling revelation that its creditors had filed a petition with the Hainan Province High People's Court to reorganize the group, that they had discovered more than 100 billion yuan ($15.5 billion) in corporate funds had been siphoned off through various means.

The financial damages incurred from the unusual transactions by HNA Group have led all three companies to expect substantial losses for 2020, and highlight the previous debt-laden buying spree by one of China's most-prominent conglomerates.

Hainan Airlines' board said it sent documents to consult with a creditors' committee seeking their views on its plan, and that 147 of the 203 committee members have agreed to it.   © Reuters

According to their respective stock exchange filings on Tuesday, the companies' plans have received certain degrees of approval by their parents, creditors and the authorities. Although the feasibility of the plans hinges on the court's decision to first accept the bankruptcy petition and then approve the companies' plans, it is another step forward in the expected restructuring of the once-acquisitive HNA Group.

Hainan Airlines, HNA Group's flagship unit, said the main part of its plan is to transfer at least 72.5 billion yuan of interest-bearing debt to its direct parent HNA Airlines Holdings and their ultimate parent, HNA Group.

The Shanghai-listed airline's board said it has sent documents to consult with the creditors' committee seeking their views on its plan, and that 147 of the 203 committee members, which hold 81.24% of the total debt, have agreed to it.

HNA Group and HNA Airlines Holdings have submitted a letter of consent, promising the airline to unconditionally and irrevocably undertake the obligation to repay the debt being transferred to them. The airline revealed that there is another layer of safeguard in that the Hainan provincial government will step in to "coordinate and push forward" if problems emerge during the debt transfer process.

For HNA Infrastructure and CCOOP, the core part of their repayment plans is to introduce an arrangement in which stocks are issued to existing shareholders by converting capital reserves pooled on their balance sheets.

In both cases, the listed companies are demanding that their parents and some affiliates surrender their shares in the two listed companies, while allowing others to retain those shares.

Details of the conversion arrangements were not disclosed, but Shanghai-listed HNA Infrastructure said that the new shares being transferred to it will be used to compensate for the 13.271 billion yuan that was part of the irregular outflows.

CCOOP, a Shenzhen-listed retail and wholesale unit, will use these shares to compensate for the 23.962 billion yuan in losses that were discovered during a self-investigation.

That method of resolving corporate debt problems is not uncommon in China. It is one of the options for Chinese-listed companies with "large capital reserves but tight cash flow," Sun Lin, a partner at Grandway Law Offices in Shenzhen, wrote in a report last August.

Indeed, both HNA Infrastructure and CCOOP are running net losses, but they have abundant capital buffer on a stand-alone basis: HNA Infrastructure had 25.901 billion yuan, as of the end of last September, and CCOOP had 20.982 billion yuan.

However, Sun wrote that in order to prevent substantial decreases of listed companies' assets, the price of capital reserve conversions needs to be "appropriate."

All three companies also have vowed to abandon part of their responsibilities of financial guarantees made for borrowings by the parent and its affiliates that were originally disclosed only at the end of last month. The guarantees total 17.16 billion yuan, with about two-thirds from Hainan Airlines.

The three companies have separately claimed that they have sufficient legal backings for the move, and they have "already obtained approval from the entitled authorities" without naming which one.

Stock market reaction was mixed on Tuesday. Both Hainan Airlines and CCOOP gained roughly 2% from Monday's close, after losing 15% and 28%, respectively, in the previous six trading days that followed the reorganization petition, while HNA Infrastructure lost 1.2%, following a 0.8% gain during that period.

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