HNA Cuts Stake In Deutsche Bank Amid Liquidation Panic

One week ago, we reported that Deutsche Bank stock tumbled to the lowest level since November 2016 amid Chinese media reports  that the bank's largest shareholder, China's biggest and most distressed conglomerate, HNA, had reportedly defaulted after it missed a payment on a peer-to-peer product sold on Phoenix Finance, an investment and wealth management platform of Phoenix TV.

The default, if confirmed, would force a liquidation scramble at HNA as creditors demanded to be made whole immediately, forcing the conglomerate to sell most or all of its assets, including its massive stakes in various global real estate investment and public companies.

Neither event should have been a surprise: in January we reported that HNA was on the verge of bankruptcy, which "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."

Since then Deutsche Bank tumbled amid fears HNA would dump its holdings, while a few days later Bloomberg confirmed that HNA's liquidity situation had indeed crossed its solvency "event horizon" and the Chinese firm had started liquidating  billions in US commercial real estate.

The stock plunged.

Commenting on this latest adverse development prompted by HNA's imploding liquidity, we told readers to "keep a close eye on Deutsche Bank stock: while HNA may have promised John Cryan it won't sell any time soon, companies tend to quickly change their mind when bankruptcy court beckons."

One week later this predication was confirmed - in part - when on Thursday night HNA announced it had cut its stake in Europe's biggest bank from 9.9% to 8.8%.

As the FT first reported, C-Quadrat, the Austrian asset manager through which HNA had initially bought its 9.9% stake in Deutsche Bank, said it had reduced its stake to “approximately 8.8 per cent” as of February 16 and that “further reduction of our holding is not planned.” We doubt the latter very much.

Incidentally, this was not the first but second sale of DB stock by HNA in the last week, which last Friday quietly snuck in the news that its share of voting rights had fallen from 9.9 to 9.2% and that it had lent 4.9% of its stake in the bank to raise funding while retaining a right to recall the stock.

In other words, between the sale of ~1% of Deutsche Bank stock, and the pledging of another 5% as collateral, HNA has obtained emergency liquidity to the tune of 6% of DBK's market cap or roughly $2 billion.

The problem is that this won't be nearly enough for the conglomerate facing tens of billions in near-term debt maturities amid a liquidity shortage, which - now that HNA has officially started dumping Deutsche shares - will further pressure DBK stock.

Worse, with HNA having pledged DB shares as collateral, any further drop in DBK stock will lead to margin calls, forcing HNA to raise even more capital as the market frontruns HNA's ongoing liquidation of DB stock. This is precisely the "worst case scenario" we first discussed last July in "A Reverse Rollup From Hell": China's "Boldest Dealmaker" Faces Margin Call Disintegration."

In retrospect, this would be a fitting end to one of the most perverse "new abnormal" relationships, one in which the "biggest shareholder of Europe's most distressed bank is China's most insolvent conglomerate."