One week ago we reported that China's largest conglomerate, HNA Group, is on the verge of bankruptcy with the company facing a 15 billion yuan liquidity shortfall in the coming weeks, with the amount ballooning exponential over the next few months. And, as we noted then, "the scale of the funding gap will likely deepen concerns about the viability of the group, which owns stakes in everything from Deutsche Bank AG to Hilton Worldwide Holdings, as it faces scrutiny worldwide from regulators and investors."
But more importantly, we said that any fears about HNA's viability "could unleash another liquidation panic in Deutsche Bank shares if other shareholders become convinced that HNA is looking to sell its $4 billion worth of DB shares (roughly a 10% stake) and try to frontrun it."
Today, this worst case scenario for China's biggest and most indebted conglomerate, appears to be now in play because according to a report in Chinese industry website Wangdaizhijia, HNA Group missed some payment on a peer-to-peer product sold on Phoenix Finance, an investment and wealth management platform of Phoenix TV. Here is the google translated summary of the Chinese news report:
Since January this year, the overdue events related to Hainan Airlines have been aroused and heated discussions. Many mutual platforms have been "lying guns." HNA cash flow is tight, related items can not be cashed on time, directly "tired" to Phoenix Financial. Some investors broke the net credit house broke the news that Phoenix Financial Products Fung Ying Ying - HHSY overdue.
Whether or not this is the beginning of the end for HNA is unclear: as we reported last week, there is a probability that the local Chinese government will bail the company out: the Hainan provincial government, which called an impromptu meeting with the company's creditors, expressed support for HNA, according to Bloomberg sources, although should China proceed with a bailout of this magnitude it would demonstrate to the world that Xi Jinping's reform agenda which includes deleveraging and allowing insolvent corporations to fail, has been nothing but smoke and mirrors.
The bigger problem is what it means for HNA's various holdings, among which Deutsche Bank of which the Chinese conglomerate is the largest holder with its 9.9% stake.
And as of this morning, it means nothing good, because in addition to a sellside analyst downgrade of Deutsche Bank, traders are increasingly worried that HNA will be forced to punt its DB share holdings to delay or avoid an imminent bankruptcy, a sale which could send the price reeling, just as we predicted last week when we warned that HNA troubled could prompt a frontrunning of its DB firesale.
And sure enough, DB stock is tumbling, down 4.1% on Wednesday, sliding to the lowest level since November 2016, and dragging the European Stoxx 600 Bank index.
Of course an HNA dump would be contrary to what DB CEO John Cryan said just a few days ago when he assured DB shareholders that he sees no changes in HNA intentions during the DB earnings call. Then again, it wouldn't be the first time Cryan hasn't told the whole truth.
As for DB's downgrade, it also took place today when Mainfirst cut the bank to underperform from neutral, lowering its PT to EU12 from EU15, on "doubts Germany’s largest bank can keep pace with competitors in 2018."
As Bloomberg notes, analyst Daniel Regli cites "damaged franchise as well as a need for substantial restructuring, including the closure of several businesses" and adds that "based on a continued below average ROTE of c.5% in 2018-2019 and a 2019E PE of ~9x, we think there are better opportunities among banks.”
He concludes that "targeted disposals aren’t coming through as expected."
A far bigger problem for the bank's shareholders, however, is if DB itself become a targeted disposal for its biggest Chinese shareholder, the frontrunning of which could send DB stock to levels not seen since the bank's existential fight for survival in the fall of 2016.