2018-02-07

Chinese Biggest Credit Risk Is Blowing Up, Fireworks Set for Spring Festival

HNA Group was best know for its main business, Hainan Airlines, until it went on a credit-fueled buying spree. Tapping the nation's insatiable appetite for wealth management products, it walked in the same footsteps as Anbang, Evergrande and others who effectively got first in line to drink the firehouse of liquidity being blasted into the Chinese economy. Shadow banking, the weakening real estate sector in 2014, the low profit margins of Chinese business, the popularity of trust products and the Chinese government's decision to flood the economy with liquidity in 2016 combined into a perfect storm, a tsunami of credit hunting for high returns and willing borrowers offering to take on the risk and put that capital to work. They used the cash for a global spending spree that eventually worried the Chinese government as U.S. dollar outflows accelerated and extreme leverage presented a systemic risk to the financial system. With the government cracking down first on trust borrowing, foreign acquisitions and now a full press on shadow banking, HNA Group ran out of willing lenders. It has pledged most of its credit-backed purchases to keep funding alive.

As with this week's blow-up in the short volatility trade, investors have been patiently waiting for this debt bomb to go off. This week HNA failed to repay on a peer-to-peer lending product issue on an online platform (JRJ.com: 重磅!海航未按时兑付连累凤凰金融项目逾期), signaling the music may have finally stopped...at least until the government steps in and bails out investors, because if there's one thing China learned from the United States is: don't pull a Lehman.

ZH: China's Largest Conglomerate Is On The Verge Of Bankruptcy
On December 8, we lamented how every few days we return to the subject of systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda. We also noted how our chief source of concern had become HNA, after it issued a bond with less than one year to maturity with the extortionately high coupon of 9%, not longer after S&P downgraded HNA’s credit rating from B+ to B, five levels below investment grade. The reason for our continuing focus on HNA is its $28bn of short-term debt which matures before the end of next June, much of it accumulated during a $40 billion binge of acquisition-driven growth which saw it become a major shareholder in Deutsche Bank, Hilton Worldwide and others.

We have repeatedly discussed how 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 last month. And yet, even as the company resorted to loaning out shares and entering into arcane derivative financing agreements to finance its debt-service payments, it quickly found out that traditional avenues of financing are disappearing or becoming too costly.

...Which brings us to the bottom line: HNA has about 65 billion yuan in debt coming due during the first quarter, and it is facing a 15 billion yuan shortfall to cover just this quarter's obligations.

In other words, if HNA fails - and the government does not bail it out - the Chinese dominos will start falling. HNA’s overall debt totals about 1 trillion yuan, with China Development Bank being the group’s biggest creditor, according to the people. That’s 56% higher than the 637.5 billion yuan in short- and long-term debt the company disclosed as having as of November.
The delayed repayment mentioned above is only one slice of a much larger set of products sold between April 2016 and January 2017:
According to net loan home to incomplete statistics, the cumulative number of project called Phoenix overflow surplus -HHSY of 1563, project release time from April 12, 2016 began, until February 11, 2017, the amount of each item of 100 million yuan, the cumulative amount of 15.63 billion yuan, an annual yield of 7.3% for each project are for a period of about 12 months. After which the sale of the product in January 2017 (ie, due to start in January this year) of the project is 777, the cumulative amount of 777 million yuan.
Only a week ago I wrote in Cash, Dollar Crunch Returns: Bankers Begging Friends for Deposits on WeChat:
If history rhymes, there's going to be some significant negative news out of China in March.
HNA could be it.

Huxiu: 17亿信托即将到期,投资人等着海航大年初一兑现
Sustainable debt cancellation issue people more worried about the debt burden of Hainan Airlines. Data show that in the first half of 2017, HNA Group's interest payments reached a record 15.6 billion yuan, an increase of more than doubled. Its short-term debt amounted to 185.2 billion yuan, exceeding its cash reserves.

Hainan Airlines in response to negative news debt in December 2017 that the Group's gearing ratio to achieve even seven drop, from 82% seven years ago, fell to 59.5%. Shortly after, Hainan Airlines announced its overall debt is currently about 250 billion yuan. But Standard & Poor's data show that as of the end of June 2017, HNA Group's long-term debt reached 382.8 billion yuan, net debt amounted to 6.5 times interest, taxes, depreciation and amortization profit.

In addition, according to the information disclosure of listed companies legal material shows that as of last year, Hainan Airlines Group's 13 domestic and Hong Kong-listed total liabilities of more than 580 billion yuan.
Another product worth 1.7 billion yuan is set to mature on Spring Festival, February 16, 2018. These products will keep maturing in waves until November 2018.

HNA isn't the only firm that loaded up with debt. Dalian Wanda is selling assets.

Caixin: Dalian Wanda Sells $1.24 Billion Stake in Film Unit
Dalian Wanda Group will sell a 7.8 billion yuan ($1.24 billion) stake in its Shenzhen-listed film unit to e-commerce giant Alibaba Group Holding and state-backed Cultural Investment Holdings Ltd., as the property-to-entertainment conglomerate shifts to an asset-light strategy.

The transaction involves 150 million shares—or a 12.77% stake—of Wanda Film Holding Co., according to a late Monday filing by the company. Hangzhou Zhenxi Investment Management Co., a subsidiary of Alibaba, will acquire a 7.66% stake for 4.68 billion yuan, while CIH is taking 5.11% at 3.12 billion, according to the statement.

...The stake sales came as Wanda Group steps up efforts to offload assets after its billionaire chairman, Wang Jianlin, vowed to transform the company into an “asset-light” business and reduce the company’s debt overhang that followed years of massive spending.

Wanda was one of China’s most aggressive overseas dealmakers, spending around $20 billion on foreign assets over the past five years. It bought film producer Legendary, theater chains AMC Entertainment Holdings, Odeon & UCI Cinemas, and a U.K. luxury yacht maker.

But the company, along with several other dealmakers, including HNA Group and Fosun International Ltd., came under closer scrutiny last summer as regulators tightened their grip on companies’ spending over concerns about capital flight and buildup of corporate debt.

Bloomberg: HNA-Like Debt Pileups Raise Risk of Forced Asset Sales in China
Indebted conglomerate HNA Group Co., which has already announced sales of an Australian office building and a stake in a U.S. shipping company, is said to be trying to sell about 100 billion yuan ($16 billion) in assets by the middle of the year.

Meanwhile, Dalian Wanda Group Co. has agreed to sell two Australian real-estate projects and is said to be seeking buyers for properties in Chicago and Beverly Hills. And China’s government is said to be seeking to orchestrate the sale of a stake in Anbang Insurance Group, a conglomerate that agreed to pay $1.95 billion for the Waldorf Astoria hotel in 2014.

...That is putting would-be sellers at a big disadvantage. The more cases there are of high-profile Chinese companies unloading assets, the more difficult it becomes for others that need to sell too, according to Rajiv Biswas, chief economist for Asia-Pacific with IHS Markit in Singapore.

“Normally with these transactions you need time,” said Biswas. “If you suddenly have to do it because the government told you to, everyone will jump on it and push down your price.”

...“We expect SOEs to deleverage over the next two to three years,” said Lee. “Everybody has to do it.”
The yuan will ultimately pick up the tab.

No comments:

Post a Comment