24 December 2017

The Mysterious Chinese Company Worrying the World

For a company regularly in the news, China’s HNA Group Co. remains shrouded in mystery. American government officials are seeking more information about the conglomerate’s ownership, the Chinese government has been asking questions and the European Central Bank is considering a review of its own. Once a little-known airline operator, HNA took on billions of dollars in debt as it made more than $40 billion of acquisitions over six continents since the start of 2016. With interests in tourism, logistics and financial services, it’s now the biggest shareholder of such well-known names as Hilton Worldwide Holdings Inc. and Deutsche Bank AG. It’s also facing mounting costs to finance its spending habits.

1. Why is HNA under scrutiny in the U.S.?

In part because it’s trying to buy a stake in SkyBridge Capital, the hedge-fund firm of Anthony Scaramucci, who was briefly President Donald Trump’s communications director. The proposed transaction has been delayed by the Committee on Foreign Investment in the United States, or CFIUS, which vets sales of American assets to foreign buyers to protect national security. HNA is also being sued as part of the U.S. bankruptcy of a travel company it invested in. And a U.S. technology firm is suing HNA for allegedly providing false and inconsistent information about its ownership to CFIUS that caused a takeover deal to collapse. HNA says the lawsuit is baseless.

2. What is being looked at in Europe?

Germany’s financial supervisor is said to beinvestigating whether HNA accurately reported its holdings when building its stake in Deutsche Bank. That deal may still be investigated by the ECB. In another takeover, Swiss regulators ruled HNA provided incorrect information about shareholdings.

3. What’s happening in China?

Local regulators have stepped up scrutiny of the country’s most prolific dealmakers, including HNA -- part of a government campaign to slow the pace of overseas takeovers, which set a record in 2016 and contributed to a surge in capital outflows. Several banks that helped fund HNA’s acquisitions spree were said to be losing their appetite for financing the company. (HNA denied that was the case.) In the final months of 2017, S&P Global Ratings and Fitch Ratings voiced concerns about at least four companies because of their ties with HNA; group flagship Hainan Airlines Holding Co. canceled a bond sale; another unit scrapped a share offering; and HNA subsidiaries paid some of their highest borrowing costs ever.

4. What’s known about HNA?

Founded in 1993 as a regional airline operator, with George Soros as an early investor, HNA says it’s created 410,000 jobs worldwide and built up assets of about $180 billion. The company "fosters a corporate culture befitting both Chinese and western society" by "incorporating traditional Chinese culture and integrating Chinese socialist values with a world-class management system," its corporate website says. Guo Wengui, the wealthy Chinese businessman who now lives in exile, has alleged that HNA has secret financial ties to top Communist Party officials. HNA denied Guo’s claims and sued him in New York for defamation.

5. So who does own HNA?

HNA disclosed in July that it’s controlled by two company-connected charities named Cihang -- one based in New York, the other in China’s resort island of Hainan -- that together own 52 percent, and that 12 company officials, including founders Chen Feng and Wang Jian, together hold about 47.5 percent. Prior to that, a little-known investor named Guan Jun had been HNA’s biggest shareholder, with a 29 percent stake, according to Chinese corporate filings in late 2016. He was holding it on behalf of the company and its leadership, Bloomberg News reported. HNA reorganized its ownership structure in early 2017 and Guan distributed most of his holdings to five individuals, who then donated the shares to HNA’s Cihang foundation. Guan donated his remaining stake, about 4.4 percent, to the charity as well.

6. Did that settle the matter?

Hardly. Among the biggest remaining mysteries: Why did HNA executives park their shares with Guan in the first place? And what to make of the unproven allegations from Guo, shared on social media from his exile in New York, that seek to tie HNA’s acquisitions to corruption among Chinese leaders and their family members?

7. What’s known about the U.S. charity?

A bit more than six months ago. Hainan Cihang Charity Foundation Inc. was formed in New York in December 2016, according to a filing with the New York Secretary of State. The charity holds 29.5 percent of HNA and its office is at 850 Third Avenue in Manhattan, a property HNA purchased in a 2016 joint venture, data from Real Capital Analytics show. In September, the nonprofit registered with the New York attorney general’s office, revealing the identity of its three directors: Adam Tan, HNA Group’s chief executive officer; Chen Guoqing (brother of co-founder Chen); and HNA Capital International CEO Guang Yang. The charity appointed former German Vice Chancellor Philipp Roesler as its chief executive officer in December and pledged to give away as much as $200 million toward philanthropic causes over the next five years.

8. What about the Chinese foundation?

Hainan Province Cihang Foundation, founded in October 2010, holds a 22.75 percent stake in HNA. The foundation’s website says it’s a nonprofit charity that "cultivates projects in various fields such as educational aids, supporting the poor and helping the underprivileged, fighting earthquake and relieving disaster, cultural promotion, medical rescue, green EP, and scientific innovation.” According to its latest annual report, the charity had 890 million yuan ($134 million) in assets as of 2015.

9. How is HNA holding up after its acquisitions spree?

Record pricing on recent debt sales and several bond sale cancellations indicate HNA is struggling to control its soaring financing costs. Its interest expenses in the first half of 2017 exceeded the company’s earnings before interest and taxes, meaning HNA has to take on more debt to keep up with existing borrowings. Its short-term debt ballooned to about $28 billion, exceeding its cash-pile levels.

10. Is it done with takeovers?

Not exactly. HNA continues to buy assets, though at a slower pace and with a focus on acquisitions that chime with Xi’s "One Belt, One Road" initiative, such as a Brazilian airport and a Singaporean warehousing-and-delivery company. However, with its finances stretched, HNA is also considering asset sales and an initial public offering of Zurich-based Gategroup Holding AG next year.

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