HNA Group, one of the largest private companies in China, has recently announced that it has entered bankruptcy proceedings because of insolvency. According to the newly announced bankruptcy plan, HNA Group will be reorganized in bankruptcy, and most of its debts will be transferred to shares, or the repayment of debts will be postponed. Some experts believe that this program is a needle in the cotton, losing money to the state and small shareholders, and fattening the power elite.
HNA’s bankruptcy was rumored last year.
At the end of February last year, the joint working group of Hainan Province was stationed at HNA Group to help it resolve its risks, which has already attracted widespread attention.
The company, which ranked second in China’s private sector with a huge revenue of more than 600 billion yuan in 2019, after several years of rapid expansion, has not moved up in the ranking of the world’s top 500 companies, as it had hoped, but is in financial crisis because of its huge debts.
New “Qingming Shanghetu”
HNA Group issued a statement on Jan. 29, saying it had received a Notice of Bankruptcy Reorganization from the Hainan Provincial High People’s Court and that the company had entered bankruptcy proceedings.
According to HNA’s financial data released in August 2019, by the end of June 2019, the company had total assets of 980.621 billion yuan and total liabilities of 706.726 billion yuan, with an asset-liability ratio of 72%.
However, according to a report in China Economic Weekly, after the working group moved into HNA, it spent several months mapping out HNA’s assets and concluded that it was seriously insolvent, and that “the gap between assets and liabilities is huge and is no longer a problem that can be solved by selling assets.” But it is unclear what the total amount of HNA’s debt really is.
At the same Time, the working group drew a diagram of HNA’s equity relationship, known internally as the “Qingming Shanghetu”, which shows the complexity of the interests of all parties involved.
According to the 21st Century Business Herald, there are 60 companies in the first batch of HNA’s bankruptcy reorganization, but this is only a small part of the nearly two hundred companies in HNA’s portfolio, in addition to a large number of other companies in the pockets, the HNA Group has a total of 2,300 companies.
Public opinion exclaims that this bankruptcy case is likely to be the largest bankruptcy reorganization case in the history of domestic corporate bankruptcy.
Bankruptcy reorganization or bankruptcy liquidation?
Gu Gang, head of the joint working group of HNA Group in Hainan Province, sent an open letter called “Letter to Family” to 100,000 employees of HNA Group on January 29, which emphasized that the bankruptcy restructuring had gone through countless arguments and stayed up all night, and the final plan was restructuring, not bankruptcy.
According to the details of the plan, it is actually a bankruptcy reorganization, not a bankruptcy liquidation.
A financial analyst who has long been engaged in financial investment work in New York and goes by the pseudonym “LT Vision” told us that in the liquidation process, the interests of shareholders are maintained equally; however, in the reorganization process, the interests of shareholders are maintained in different ways. Some shareholders report losses at one time, some compensate slightly, and some shareholder interests are placed in the newly reorganized company.
A report in China Economic Weekly disclosed that in the process of HNA’s restructuring, new private capital will be introduced as strategic investment, and the interests of old shareholders may be sold to strategic investors.
Xie Tian, a professor at the University of South Carolina School of Business, believes that there is a powerful background behind HNA from the top of the Communist Party of China, and that their interests as major shareholders have long been fished back. “Such a big company, such a big piece of cake, has been divided up alive and well. They ate it up through a variety of ways, a variety of subsidiaries, purse companies; and the average shareholder’s money was lost.”
Yu Da, an assistant professor of finance at New York University in Shanghai who has been following HNA for a decade, believes that the maintenance of the interests of creditors and shareholders depends on negotiations, “This thing is still a negotiation thing at the end of the day, and there are many, many factors. If you look back, you’ll know that it actually depends on what percentage of the company’s losses you can accept and so on.”
Powerful background and centralized system
Xie Tian’s reference to the powerful Communist Party background behind HNA has been rumored for some time, and in 2017, Guo Wengui, a Chinese tycoon in exile, drew widespread attention when he published a map of the powerful connections behind HNA via social media, even involving the family of current Chinese Vice President Wang Qishan.
He Pin, president of New York-based Spiegel News Group, analyzed to the station that the influence of Wang Qishan and Yao’s family is behind HNA, but may not necessarily be as exaggerated as rumored.
This complex background of powerful people has not been fully confirmed yet, but it is worth noting that there are serious cases of misappropriation of funds within HNA. Several Chinese and foreign media have reported that HNA’s subsidiaries Hainan Airlines Holdings Co., HNA Infrastructure Investment Group Co. and Supply and Marketing Grand Group Co. jointly said on Friday that shareholders and their related parties had misappropriated a total of 61.5 billion yuan in funds.
The China Economic Weekly report suggests that the unknown popularity of funds within HNA has an element of high centralization within the group. Although the companies within the group are independent entities, they cannot be independent in terms of management, and a transfer order from one person above can just move the funds of all its companies without any firewall.
In 2014 and 2015, HNA Group co-founder Chen Feng and his brother Chen Guoqing and an affiliated company they lead bought four residences in One57, a skyscraper on Manhattan’s Billionaire’s Row, for a total price of $151.34 million.
According to the Wall Street Journal, Chen Feng and Chen Guoqing have purchased more than two dozen properties in New York and New Jersey in the past two decades. HNA Chief Executive Officer Adam Tan Xiangdong (Adam Tan) has done similar.
Some outsiders questioned that these outbound purchases were a use of HNA’s funds.
The reasons for the failure and the loss of the country
But the buying and selling of individuals such as Chen Feng is small compared to the extremely rapid expansion of HNA Group overseas in previous years.
In the three years from early 2015 to 2017, HNA’s foreign acquisitions amounted to nearly $50 billion, which included: the $10 billion acquisition of CIT Group’s aircraft leasing business, the $6.5 billion acquisition of about 25 percent of Hilton Group, and HNA becoming the largest shareholder of Deutsche Bank in 2017, among others.
A large amount of the money for HNA’s extremely rapid expansion came from bank mortgages. Although many of these and purchased to foreign high-quality assets, but not enough to bring HNA sufficient profits. It is widely believed that the main cause of HNA’s defeat was precisely the repetition of mortgages, and finally insolvency.
The way HNA obtained funds for expansion through mortgages, in Yu Da’s opinion, there is nothing wrong commercially, “is to go back to a question, the lender is very confident in his credit, his ability to carry out the supplement, most simply put, they have a lot of real estate to mortgage, why not?” But he also said that these are high-risk behaviors.
Ding Hongbin, a professor at Loyola University School of Business in Maryland, believes that HNA’s rapid expansion overseas back then was problematic at first glance, “Five or six years ago, HNA’s operation was really like buying stocks, because it had money on hand, it went to buy stocks, and when buying stocks was not too much, it bought the company and became the owner, so there would definitely be problems.”
He stressed that this shows that there is a big problem in HNA’s internal management, “When your board of directors and corporate executives are completely a community of interest, the board of directors has no checks and balances and becomes a complete rubber stamp. If you want to be accountable, including the entire board of directors, including some executives like Chen Feng, all have joint and several responsibilities.”
It’s unclear what responsibility Chen Feng and others bear for HNA’s current wreckage, and the domestic media have avoided reporting on this key issue. But the biggest victims have surfaced in the wreckage left behind by HNA executives’ unfettered and frenzied expansion.
Most of HNA’s unpayable loans came from state-owned banks, and in the bankruptcy restructuring plan, most of the debts will be converted to equity. Professor Xie Tian said, “The debt-to-equity swap is mainly for the banks, the banks ride in the money, restructuring, in fact, or the country’s money, the country’s money is the money of the Chinese people, in fact, is to use the wealth of the people to fill the hole of these corrupt officials.”
Xie Tian said pessimistically, after the restructuring of HNA will not be good, no one will have the heart to really run it, just as a cash cow.
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