Anbang? Evergrande? Or Does HNA's Bond Sale Mark The Beginning Of China's Minsky Moment?

We know... there are several candidates to choose from. For example…

It might be Anbang - the acquisitive insurance behemoth – see “Anbang Just Became A ‘Systemic Risk’: Revenues Crash As Its Chairman Is “Detained”

It might be China Evergrande – the developer of “ghost” properties and described by J Capital’s, Anne Stevenson-Yang as “the biggest pyramid scheme the world has yet seen” – see “Stevenson-Yang Warns ‘China Is About To Hit A Wall”.

Or…it might be HNA. The highly-leveraged Chinese conglomerate, which has been on an overseas acquisition binge, is paying more for a 363-day dollar loan than serial defaulter, Argentina, paid on a 100-year loan earlier this year.

HNA has $28bn of short-term debt coming due before the end of June 2018, most of which has been accumulated during the last two years. As Bloomberg reports, HNA Group Co., which once symbolized China’s insatiable appetite for overseas assets, is offering to sell the country’s most expensive short-term dollar bond ever as it tries to refinance a wall of maturing debt amid government scrutiny. The company is marketing a 363-day bond at nine percent which is expected to price Thursday to refinance offshore debt, according to a person familiar with the offering, who isn’t authorized to speak publicly and asked not to be identified. The previous record was Herun Holdings Ltd.’s eight percent notes sold in September…

See the interview on the HNA bond offering with Bloomberg’s Lianting Tu.

Like Anbang, HNA has over-extended itself buying overseas assets as Bloomberg explains...

The sale is the latest indication that HNA’s $40-billion-plus acquisition spree since last year, where it became the largest shareholder in companies such as Deutsche Bank AG and Hilton Worldwide Holdings Inc., is catching up to the company as it accumulated about $28 billion in short-term debt. HNA’s interest expenses doubled in the first half, when it paid more than any other non-financial company outside of the U.S. and Brazil, according to data compiled by Bloomberg.


"Nine percent is really high for one year," said Warut Promboon, managing partner at credit research firm Bondcritic. "Basically, it tells you that the worry is real." 

As we discussed in our July piece "It Feels Like An Avalanche": China's Crackdown On Conglomerates Has Sent A "Shock Wave" Across Markets”, HNA is suffering from the backlash of an insanely out-of-control acquisition strategy and a crackdown by the Chinese Government’s on outbound investment (A.K.A. DOLLAR FUNDING SHORTAGE) and corruption. Beginning with Anbang, the authorities have targeted each of the “famous four” Chinese conglomerates, the other three being HNA, Dalian Wanda Group and Fosun International.

By issuing offshore (dollar) bonds with less than a year to maturity, HNA has found a way to circumvent the government’s restrictions on outbound investment – although this is probably not what officials had in mind. Bloomberg explains...

Bonds due in a year or less, which do not need government approvals, started to appear earlier this year after the National Development and Reform Commission started withholding approvals for offshore debt for some sectors.


A representative of HNA couldn’t immediately comment. HNA was among conglomerates that spearheaded the record $246 billion in outbound acquisitions announced by Chinese companies last year, according to data compiled by Bloomberg. Then the government began restricting capital outflows to protect the yuan from depreciating further.

Delving into HNA’s metrics, Bloomberg finds that HNA’s interest costs exceed EBIT at the group level, while its subsidiaries rush to refinance existing debt.

Now, costs are piling up. HNA’s interest expenses more than doubled to a record 15.6 billion yuan as of the end of June, exceeding the company’s earnings before interest and taxes. Its short-term debt ballooned to 185.2 billion yuan, exceeding its cash-pile. The bond offering comes days after HNA’s flagship carrier, Hainan Airlines Holding Co., sold a $300 million 364-day dollar note at a yield of 6.35 percent, higher than the 5.5 percent it offered for a short-term note in June. The carrier has applied for an offshore bond issuance quota from the NDRC, according to people familiar with the matter last Thursday. A unit of HNA is also seeking a loan of about HK$6.4 billion ($820 million) to help refinance borrowings related to a land purchase in the former Kai Tak airport area in Hong Kong.

In “Hainan’s Bottomless Credit” from 20 April 2016, Bloomberg expressed disquiet about HNA’s financial position - and its borrowing costs have risen as the current bond issue clearly shows. As Bloomberg lamented...

None of this necessarily matters as long as HNA has the earnings and liquidity to meet its debt payments promptly, and the operating performance to deliver rising profits. Things don't look too hot on that front, though.


Take a look at HNA's quick ratio and interest cover, which gauge its ability to meet short-term liabilities and pay its interest out of income. Both are around or below their respective safety levels of 1 and 1.5 times. Return on assets hasn't cracked above 1 percent throughout the period, suggesting the group would have been better off sticking its money in the bank. HNA's performance metrics leave a lot to be desired...

In another piece, “A Reverse Rollup From Hell’: China's ‘Boldest Dealmaker’ Faces Margin Call Disintegration” this July, we questioned whether HNA’s practice of pledging its own shares and those of its investments would eventually lead to a catastrophic margin call. From our post.

…while most Chinese companies pledged "only" their own shares to get loans, a handful of companies also used shares of the acquired companies as pledged collateral. This is precisely what HNA Group did, which now faces not only growing regulatory scrutiny from Beijing that threatens to spook bond investors and raise HNA’s financing costs, but also send its shares plunging as holders are forced to liquidate even as most of the shares pledged to fund its buying spree are already declining, accelerating its demise. And, in a scenario that can only be dubbed as a "reverse rollup from hell" - on steroids and margin - one that would make even Valeant blush and snicker, if the value of its collateral, i.e. stock price, falls enough, HNA will soon be forced to sell its holdings to repay debt, thereby resulting in the disintegration of the company.

HNA is a private company and, although a breakdown of its share pledges is not available, Bloomberg compiled a detailed look at its exposure (see below) and concluded...

HNA and its units have pledged at least $24 billion of shares across 15 publicly traded firms, including the Hilton and Deutsche Bank stakes, filings show. HNA-related entities also have pledged billions more of unlisted assets that include shares of holding companies, land-use rights, planes, a golf resort and $289,000 of corporate vehicles. Shareholders pledged a 17 percent stake in the group’s closely held parent, according to government filings obtained by Bloomberg that document the pledges.

We have two questions:

  • Does paying a 9% yield on a 1-year note signal that HNA is getting close to the catastrophic margin call we alluded to 3-4 months ago?
  • If so, is this what PBoC Governor, Zhou Xiaochuan, was concerned about when he said at the recent Party Congress “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment”?