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China debt crunch

HNA restructuring advances with $5.7bn airline funding

Investors for infrastructure unit approve capital expansion

A Hainan Airlines Boeing 787 in Beijing: The carrier is the core unit of Chinese conglomerate HNA Group.   © Reuters

HONG KONG -- Bankrupt Chinese conglomerate HNA Group has moved a step forward in its restructuring process this week with a plan to inject fresh capital into its core airline and infrastructure subsidiaries.

Investors in Hainan Airlines Holding agreed on Monday to a plan to double its capital base and allot new shares to a designated strategic investor and a group of creditors who will be compensated in stock, according to an announcement.

The bankruptcy administrators, appointed by the People's High Court of Hainan Province, have selected Liaoning Fangda Group, an industrial conglomerate with operations in carbon, steel, medicine and retail, as the carrier's strategic investor.

A total of 16.43 billion new Hainan Airlines shares will be issued, expanding the total number of shares to 33.24 billion. The sale price was not disclosed, but based on Friday's closing price of 2.25 yuan on the Shanghai Stock Exchange, the new issuance will be worth around 37 billion yuan ($5.72 billion). Hainan Air shares on Tuesday closed 4.9% higher at 2.36 yuan, after the suspension of trading on Monday.

Among the new shares, at least 4.4 billion will be allocated to the strategic investor, while the rest will be used to repay part of the debt.

The investors in HNA Infrastructure Investment Group, another Shanghai-listed unit of the conglomerate, followed the airline on Tuesday and voted to approve a separate arrangement.

A disclosure to the Shanghai Stock Exchange indicates the company will triple its capital base and split the shares among the designated strategic investor, certain creditors accepting reimbursement in shares, and existing small investors. Less than 3% of the expanded share base is set to be canceled to fulfill the company's undertaking made prior to the bankruptcy filing.

The strategic investor for the infrastructure company is Hainan Development Holdings, a conglomerate controlled by the Hainan provincial government, and about 29% of the total shares will be allocated. No price tag has been attached to this share issuance as well, but it would worth about 86.28 billion yuan, if Monday's closing price of 11.04 yuan is applied. HNA Infrastructure is expected to resume trading on Wednesday after a full day of suspended trading on Tuesday pending this announcement.

These disclosures come just days after debt-laden HNA Group, a once-aggressive buyer of foreign assets that became one of China's most high-profile corporate bankruptcy cases, said its chairman and chief executive had been taken away by Chinese police on suspicion of unspecified crimes.

These steps mark a small but significant step in the bankruptcy proceeding of HNA Group, which was first filed in January.

However, the creditors' votes on bigger restructuring plans for both companies were postponed until Oct. 20. They said the delay allows more time for certain creditors to make their decision. For Hainan Airlines, the plan is to merge 11 airline-related companies into a single new unit, while HNA Infrastructure looks to form a new corporation by combining 21-airport related companies.

The plan disclosed by Hainan Airlines on Monday evening would see the airline combined with 10 affiliates, including Urumqi Air, Fuzhou Airlines, China Xinhua Airlines, Shanxi Airlines, Lucky Air, Air Changan, and Guangxi Beibu Gulf Airlines.

According to the disclosure, the 11 entities owe a total of 397.2 billion yuan to 4,915 creditors. Their assets add up to only 94.58 billion yuan, while the total liquidation value, not including leases and other intangible assets, was 40.95 billion yuan -- far short of their total liabilities.

For HNA Infrastructure, the claims by 21 entities totaled 95.19 billion yuan after submissions from 3,242 creditors were sifted out by the court. Assets, on the other hand, total 48.16 billion yuan at face value, but their liquidation value is 22.89 billion yuan.

Certain claims will be prioritized, including employees' wages and various taxes, which are stipulated to be paid in full by cash. Smaller creditors of less than 100,000 yuan will be compensated in full as well.

Creditors will be protected to the extent of the market value of their collateral, but the remaining portion with interest will be repaid in installment plans. For the airline's creditors, the interest payments are to be made twice a year starting June 20, 2022, while principal will be reimbursed over 10 years beginning on Dec. 20, 2023.

But for the airport cluster, initial payment of the principal is deferred until Dec. 21, 2025, but will be completed within 10 years. For construction payments only, the repayment term is set for three years starting on Dec. 21, 2022.

HNA Group was once among China's most acquisitive conglomerates, buying up assets such as the Radisson hotel chain, aviation services company Swissport Group and stakes in Deutsche Bank and airlines and airports, in countries as far flung as Brazil, Australia, Ghana, Turkey and South Africa. The rapid expansion with heavy reliance on leverage led to a crash crunch, which surfaced in 2017.

The Hainan court ruled in mid-March to consolidate the bankruptcy restructuring procedures by virtually merging the parent HNA Group with 320 of its affiliates. The decision to treat them as a single organization followed the court's assessment that the group's management was "highly mixed up" and "chaotic," claiming companies were independent in name only.

Gu Gang, who heads the court-appointed working group and the most-important Communist Party cell in HNA Group, said in an internal meeting on Sept. 18 that the group would be split into four independent entities -- airline, airport, finance and commercial and others. According to the company's official WeChat account, Gu told over 2,000 employees that day that these new entities will "each be led by new controlling shareholders and completely be independent from each other."

Last Friday, Chairman Chen Feng and CEO Tan Xiangdong, co-founders of the group and part of the previous management team, were detained by local Hainan police "due to alleged crime," according to the company's statement. As of Tuesday evening, details of the allegations and their whereabouts remained unknown.

Chen and Tan, also known as Adam Tan, had de facto control over HNA Group's largest shareholder, Hainan Cihang Charity Foundation, as part of the previous management team.

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