Two weeks ago, when discussing the troubles plaguing one of China's conglomerates and "boldest dealmaker", HNA Group - recently best known for acquiring Anthony Scaramucci's SkyBridge capital in a transaction that has yet to close - we said that what until recently was one of the world's most aggressive roll-ups of varied companies from around the globe, including stakes in Hilton Companies and Deutsche Bank, as well as countless Chinese acquisitions, could very soon become the "reverse roll-up from hell", as the stock price of HNA tumbled, putting the roughly $24 billion in loans that had been taken against HNA stock in jeopardy of breachin their LTV limits, forcing a massive margin call, and potential firesale liquidation of the company's assets as shown in the chart below...
... which have been hit with the double whammy of various rating agency downgrades in recent months, further eroding the collateral value of HNA's various assets.
Yet while the fate of HNA's conglomerate future still remains largely in the hands of the market, which could easily prompt a firesale if it were to push HNA stock low enough, another Chinese conglomerate may not have the benefit of the market's potential generosity, because according to Bloomberg, Chinese authorities have asked HNA's peer, Anbang Insurance Group, the insurer whose chairman was recently detained in June and was classified as a potential "systemic risk" to China's economy, to sell its overseas assets.
In addition to demand a liquidation of many if not all assets acquired by Anbang over the past three years, the government also asked the company - whose Chairman will surely comply following his brief "detention" - to bring the proceeds back to China after disposing of holdings abroad, suggesting not only growing concerns about Chinese capital outflows, but Beijing's apparent intention to undo the massive Chinese M&A wave that swept the globe from 2014 through most of 2016, and led to the infamous "Chinese acquisition premium."
Bloomberg notes that it is not clear yet how Anbang will respond, and in a WeChat message, the insurer said that “Anbang at present has no plans to sell its overseas assets," although that is sure to change once Beijing asks again, less politely this time. "Currently, Anbang’s various businesses and operations are all normal, and the company has ample cash and sufficient solvency capabilities.”
Anbang, together with HNA, Wanda and Fosun, were the four most prominent Chinese conglomerates which unleashed a buying binge across the globe, fueled by soaring sales of investment-type insurance policies. Since 2015, the four companies completed a combined $55 billion in overseas acquisitions, 18% of Chinese companies’ total, and according to some, were instrumental in accelerating China's capital outflows over the same period.
Anbang first emerged in the public arena with its high profile 2014 acquisition of New York’s Waldorf Astoria hotel. Subsequently, Anbang and its peers acquired such trophy assets as AC Milan, Legendary film studios and Hilton Worldwide.
Anbang alone made billions in acquisitions in such businesses as the Westin St. Francis, InterContinental Miami, Rabobank's mortgage portfolio and various other M&A targets around the globe.
However, it all ended with a thud in mid-June, when Anbang Chairman Wu Xiaohui was detained for questioning, while the policies fueling the company's growth have been all but banned by regulators. At this moment Anbang is merely a shell corporation, with virtually no new business creation, one whose massive debt load threatens to careen the company soon if it does not find sources of cheap liquidity and fast.
At a twice-a-decade conference on financial regulation convened by President Xi Jinping this month, policy makers pledged to rein in corporate borrowing and said that preventing systemic risk was an “eternal theme.”
Making matters worse is that Anbang’s rise in recent years was fueled by sales of lucrative wealth-management products that offered among the highest yields compared with peers, a key spoke of China's $9 trillion shadow banking universe. China’s insurance regulator this year started clamping down on what it termed “improper innovation” and tightened rules on high-yield, short-term investment policies. Anbang and other aggressive insurers such as Foresea Life got caught up in the crackdown.
Where Anbang's death spiral could turn especially aggressive, is if Anbang customers start surrendering their policies and stop buying new ones, a feedback loop that would accelerate a continuing cash drain at the company, while forcing its existing product suite of wealth products to default, leading to the biggest risk facing China's economy: a shadow bank run.
One Anbang product, called Anbang Longevity Sure Win No. 1, boosted the firm’s life insurance premiums almost 40-fold in 2014 by offering yields as high as 5.8 percent. That helped provide fuel for the firm’s more than $10 billion of overseas acquisitions since 2014 and equally ambitious investing in the domestic stock market.
If investors realize that not only China's M&A party is over, but that the shadow banking sector is facing a potential default cliff, the scramble to recover invested capital will be unprecedented.
For now, Anbang can delay the inevitable cash call by following Beijing's demands, and slowly - at first- begin liquidating its trophy offshore assets, and repatriating the proceeds, effectively inverting the outbound M&A surge that marked the past three years. The good news is that at least at this moment, there are plenty of willing buyers for the upcoming Anbang firesale..