To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor"

The notoriously acquisitive Chinese conglomerate HNA - which recently had a sharp falling out with Beijing resulting in a margin call "shocksave" - is facing a serious cash crunch in 2018 as nearly a quarter of its $100 billion in debt – a large chunk of which was accumulated during a multi-year buying spree that saw it become a major shareholder in Deutsche Bank, Hilton Worldwide and a large portfolio of international holdings - comes due.

But even as the company resorted to loaning out shares and entering into arcane derivative financing agreements to finance its debt-service payments, it is quickly finding that traditional avenues of financing are disappearing or becoming too costly.

Despite being one of China’s largest conglomerates, HNA has been shut out of stock and bond markets as lenders worry about its outsized debt load, forcing the company to pledge some of its core holdings as collateral for short-term loans, as the Wall Street Journal reported earlier this month.

This has forced the conglomerate to explore other options. To wit, the bank recently pledged some of its Deutsche Bank shares to UBS as collateral for a loan worth roughly $117. It also executed an options strategy known as a collar. This strategy involves purchasing out-of-the-money puts to protect against a large drop in the stock while simultaneously selling out-of-the money calls to offset the cost of the puts.

On Dec. 20, HNA’s unit entered into a new series of collar transactions with Swiss bank UBS Group AG, and pledged its Deutsche Bank shares to UBS in exchange for a total of 2.36 billion euros (US$2.8 billion) in net financing. It also has a margin loan from UBS and ICBC Standard Chartered PLC. In all, the new total amount of financing was about 99 million euros (US$117.6 million) higher than what was disclosed in a similar filing in May.

 

The additional collar financing disclosed this week should help protect HNA’s position in Deutsche Bank shares from margin calls in the future, according to people close to the companies. The new collar financing extends to 2020, longer than before, and gives HNA additional protection against volatility in Deutsche Bank shares, they said.

With memories of last fall’s dramatic plunge in Deutsche Bank shares still fresh – a selloff that was triggered by the DOJ’s decision to slap the already shaky German lender with a $14 billion fine – HNA assured its fellow shareholders that it is a “long-term investor” in Germany’s largest bank.  The comment is, of course, self-serving: Though it has purchased downside protection to protect against a large drop in DB’s shares, a substantial decline in the company’s valuation could be the straw that pushes the conglomerate into bankruptcy, and potentially triggers China’s "Minsky moment."

For context, HNA owns about $4 billion in DB shares, roughly equivalent to a 10% stake, as shown in the Bloomberg chart below and according to Reuters.

Concerns about HNA’s financial position intensified since it issued a bond last year with less than one year to maturity. The bond carried the extortionately high coupon of 9%, prompting us to wonder if the demise of one of China’s “Big Four” conglomerates might be rapidly approaching.

HNA has borrowed $40 billion since 2015 to finance its world-wide buying spree. But in some cases, it’s already getting buyers remorse. About a month ago, its chief executive acknowledged a shift in strategy, saying HNA was looking to sell assets it deemed noncore. For example, it is exploring a group of foreign commercial properties it owns.

As reported by Reuters, Alexander Schuetz, HNA’s representative on DB’s board, made the comments during an interview with German newspaper Handelsblatt. The comments were later picked up by Reuters and Bloomberg. Schultz specifically emphasized that HNA has “no interest in a sale” of its DB holdings.

Schuetz sought to dismiss any lingering speculation that HNA would sell its stake in the German lender, which is just under 10 percent and valued at around 3.3 billion euros ($3.9 billion). “We want to show that this is totally wrong,” he was quoted as saying.

 

HNA’s $50 billion worth of deal-making over the past two years has sparked intense scrutiny of its opaque ownership and use of leverage.

 

In the interview, Schuetz pointed to a new financing structure with derivatives - with a three-year maturity - that insure against a drop in the bank’s share price. “This shows that HNA is focused on the long-term and has no interest in a sale,” Schuetz said.

Late last month, S&P downgraded HNA’s credit rating by one notch from B+ to B, five notches below investment grade as a result of its “aggressive financial policy” and tightening liquidity amid looming debt maturities. Even before that, some of the conglomerate’s largest subsidiaries were issuing bonds with interest rates far higher than their credit ratings would seem to suggest.

To be sure, despite its reassurances, if HNA is still struggling to raise the capital needed to make its $28 billion debt-service payment at the end of June, it’s likely even core assets might be put on the chopping block.

Comments

TheSilentMajority Wed, 12/27/2017 - 06:35 Permalink

“Denying” it as they divest it is classic chinaman and goldmanstein strategy.

Regardless, DB is going to implode to zero once the next bout of sustained equity market weakness happens. Just a matter of time, sooner more likely than later.

Lietemigrantas Wed, 12/27/2017 - 06:35 Permalink

FED Reserve is ready to step in again and prop up DB as they have been doing for the past 2+ years. Free money can work miracles to keep the Ponzy scheme going as long as it is needed. By the looks of it not too much longer. Crypto SDR is on it's way!

Ghost who Walks Wed, 12/27/2017 - 06:54 Permalink

Reading through the detail, it was not clear to me if DB has a final settlement with the American DOJ?The linked article suggested that it might drop from a $14B fine to something closer to $5B. That would have a material effect on the current DB share price that should be positive.So we reach an interesting juncture on the road to peak debt; we have a German bank that might trigger a Chinese Minsky moment, because of a very large fine from the DOJ that was in response to a back-tax bill on an American Corporate by the EU.I've read that the Chinese has been net sellers of US Treasury Bonds for a while. It would be ironic if both the US and Chinese debt bubbles burst because of the lending actions of a German bank in America.Anyone know what the current situation for DB is with the DOJ fine?

GreatUncle Wed, 12/27/2017 - 07:16 Permalink

Looks like the Chinese were suckered into the "it is all economically fantastic in the west and a great place to invest money"!It ain't and people be you Chinese or anybody else needs to realise the economy only still functions by CB fraud.

hibou-Owl Wed, 12/27/2017 - 09:10 Permalink

Pledging rate is pretty high on the investments, looks like they've swapped the lot for debt, and now need more. OOPS!Who's on the other side of the options (10% of DB), could it be DB propping the price up???.? No one else is silly enough.    

Racer Wed, 12/27/2017 - 09:55 Permalink

Saying they are not thinking of selling reminds me of Hanky Panky saying that Fannie and Freddie were perfectly okay moments before they went belly up! 'sub-prime is well contained' moment methinks!

Cman5000 Wed, 12/27/2017 - 10:30 Permalink

HNA... owns Carlson Corp Radisson chains shit is already hitting the fan with global restructuring and layoffs by Feb or March they should be  in meltdown mode. Why the Carlson family decided to sell to the Chicoms is beyond me ? Should have merged with another Hotel or partnered with Europeans.