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China debt crunch

Investors eye key assets in HNA Group bankruptcy restructuring

Creditors gather for first meeting as affiliates count losses from web of links

HNA Group's restructuring took a key step forward with the first official creditors meeting.   © Reuters

HONG KONG -- With billions of dollars in aviation and other assets in play, creditors of China's bankrupt HNA Group gathered online and in person for their first official meeting on Friday.

The group's restructuring likely has months or even years to go, with the meeting representing a key step forward in a process that will be felt by companies from Asia to the U.S. and Europe.

HNA Group gained worldwide attention for its aggressive purchases of well-known assets, including the Radisson hotel chain and aviation services company Swissport Group, as well as stakes in a global network of airlines and airports. But HNA and Chinese peers Dalian Wanda Group, Anbang Insurance and Fosun International were forced to rein in their free-spending ways over the past few years and pay off debt as Beijing moved to reduce systemic financial risk.

The Hainan Province High People's Court, which is handling the HNA case, consolidated the restructuring of HNA Group with 320 of its affiliates in mid-March. The decision to treat them as a single organization followed the court's assessment that the group's management was chaotic, with companies that were independent in name only.

January's bankruptcy filing has shed light on a tangled web of financial dealings and irregular cash outflows. The magnitude of the issue will be further revealed as court proceedings advance, but the aggregate net losses of 14 HNA affiliates with listed shares provide a glimpse at the problem. Such losses totaled 95.72 billion yuan ($15 billion) in 2020, due in large part to write-offs of intragroup debts and related impairments and provisions. In 2019, these affiliates collectively made 125.54 million yuan in net profit.

The biggest loser was Hainan Airlines Holding, HNA's core unit and the country's fourth largest carrier, which slid to a net loss of 64 billion yuan from a net profit of 519 million yuan in 2019. Though bigger peers China Southern Airlines, China Eastern Airlines and Air China each recorded losses last year due to the pandemic, the combined sum of 37 billion yuan was much less than Hainan's alone. Over 80% of Hainan Air's net loss, or 51.55 billion yuan, involved nonoperational items, primarily related to HNA's restructuring.

According to a person who attended Friday's meeting quoted by Reuters, a bankruptcy administrator said that 67,400 creditors had filed 1.2 trillion yuan of claims in the restructuring case. Of that total, administrators had verified 405.7 billion yuan in claims and rejected 353.5 billion yuan worth, with the rest still under screening.

The impact of the bankruptcy proceedings is carrying beyond the 321 companies directly involved.

HNA affiliate Bohai Leasing is not part of the court-led restructuring, but has missed out on a dividend of $166.71 million from subsidiary Avolon Holdings, an Ireland-based aircraft lessor, due to the failure of some HNA Group airlines to stay current on their lease payments, according to notes in Bohai's annual report.

Avolon's withholding of its dividend stems from an agreement reached when Japanese financial group Orix bought a 30% stake in the Irish company in 2018. The missing dividend is equivalent to about 60% of the net profit Bohai recorded in 2019.

In 2020, Bohai swung to a net loss of 7.7 billion yuan, due to pandemic-led disruption to its aircraft leasing business as well as impairment charges related to HNA's bankruptcy.

Hainan Airlines' accounts payable on aircraft operating leases stood at 11.14 billion yuan as of Dec. 31, almost triple the level a year earlier. Bohai's books, meanwhile, showed total unpaid lease charges due from Hainan Airlines and sister carriers Beijing Capital Airlines, Lucky Air and Tianjin Airlines at 2.34 billion yuan as of Dec. 31 and overall accounts receivable from HNA Group companies of 3.61 billion yuan. Of that sum, 3.02 billion yuan, or 83%, has been marked as potentially uncollectable.

Hong Kong-listed HNA Technology is not on the court-led reorganization roster either, but has also been impacted by the bankruptcy. Parent company HNA Technology Group has a few other affiliates on the court list, and HNA Technology previously guaranteed 5.58 billion yuan of their borrowings.

Lenders have gone to court to seek funds from HNA Technology under those guarantees, with an eye especially on $7.2 billion the company stands to receive from the sale of American computer products distributor Ingram Micro to U.S. investment firm Platinum Equity.

HNA Technology on Sunday affirmed that, despite HNA Group's bankruptcy, the deal would move ahead. However, board director Zhu Yingfeng, representing shareholder Guohua Life Insurance, which holds a 14.3% stake in HNA Technology, voted against all motions related to the deal. Calling Ingram Micro a "rare and commendable high-quality asset," Zhu said Monday he thinks a better deal can be made.

The fate of Hainan Airlines itself is also in focus. HNA's caretakers posted a public notice inviting strategic investors in late March. Nothing has been announced since the submission period closed in April, but at least two groups are known to have shown interest.

One is a consortium led by Juneyao Group, parent of Shanghai-based Juneyao Airlines. Another group is led by Shanghai Yuyuan Tourist Mart Group, a unit of Fosun.

Each announced separate plans in April to create new vehicles for investment in unspecified airlines, with Juneyao's to get up to 30 billion yuan in capital initially and Yuyuan's 40 billion yuan.

"Inviting strategic investors is the responsibility of the caretakers, and the work is now ongoing," Liu Lu, chairman of Hainan Airlines, told investors during an online forum May 24.

Gu Gang, who leads the court-appointed administrators and the Communist Party cell of HNA Group, told his staff at an internal meeting last week that the restructuring is being "carried forward in a steady and orderly manner."

Additional reporting by Cora Zhu

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