State Airlines Shy Away From HNA Restructuring, which is Postponed For Three Months

By Iris Ouyang

2021-8-10

On August 10, Gao Feng Advisory’s CEO Dr. Edward Tse was quoted by South China Morning Post on HNA.

Embattled Chinese conglomerate HNA Group will delay the submission of a proposal for the restructuring of its heavily indebted airlines-to-property business, as China’s state-owned carriers have steered clear of bailing out the country’s biggest private-sector carrier, according to sources familiar with the matter.

The restructuring of Hainan-based HNA will most probably involve consortiums comprising multiple companies. The government working group that seized control of HNA in late February 2020 will make sure Hainan Airlines remains a private company and will ring-fence it from the country’s three biggest state-owned carriers, said the sources, speaking on condition of anonymity. HNA Group’s debt amounts to at least US$187 billion HNA Group and Hainan Airlines did not respond to requests for comment.

HNA, which used to own a global assets portfolio that ranged from the largest stake in Deutsche Bank to 25 per cent of Hilton Hotels, entered bankruptcy restructuring in January, a year after its previous management was ousted in a state takeover. As a state ward, the company began looking for strategic investors publicly in March and has been shedding its international assets.

A deadline for HNA’s restructuring plan was postponed to November 10 from August 10 by the Hainan High People’s Court in a ruling last Friday. The provincial authorities, which are represented on the committee that oversees HNA, want the management of HNA’s airport assets – including Haikou Meilan International Airport, the gateway to Hainan province’s capital – to remain in state hands. They also want at least one member of any consortium for airport assets to be a state-owned enterprise, the sources said.

“The work related to laying down of the proposal for restructuring plan is still undergoing. The related content of the proposal has not been finalised. The company and its subsidiaries applied to the Hainan High People’s Court to extend the submission deadline of the proposal for three months,” Hainan Airlines said in a filing on Friday. The airline was successful with its application, and said it would continue to work on the proposal based on asset investigation, liability review and the introduction of strategic investors.

Reluctance among the three state-owned airlines – Air China, China Southern Airlines and China Eastern Airlines – to acquire a stake in HNA is down to China’s aviation industry being hit hard by the outbreak of the Covid-19 pandemic, the sources said. The sector’s net losses reached 97.4 billion yuan (US$15 billion) last year, while revenue dropped 41.1 per cent to 624.7 billion yuan, according to data from the Civil Aviation Administration of China. In the first quarter, the three airlines lost 14 billion yuan, while losses at Hainan Airlines amounted to 2.6 billion yuan.

The airlines have also stayed away because Beijing is trying to avoid excessive state involvement in the aviation industry, the sources said. Moreover, there are concerns the private sector is lagging behind – the big three carriers already account for 60 per cent of market share.

“The government working group set out several principles at the very beginning. One of them was that HNA would continue to be private and that the three big airlines would not get involved in it,” one of the sources said.

There have been other contenders, as reported by local media. Shanghai Juneyao Group was the first possible investor that emerged. Its Juneyao Air on April 30 and affiliate financial firm Shanghai AJ Group said on May 20 that they were planning to invest 5 billion yuan and up to 4 billion yuan, respectively, towards a 30 billion yuan fund that would set up a company and invest in an aviation company.

Shanghai Yuyuan Tourist Mart Group, a subsidiary of Fosun Group, said on May 19 it would contribute up to 10 billion yuan to a fund that would be capped at 40 billion fund and set up another aviation enterprise with co-investors. Neither Juneyao and its affiliates nor Shanghai Yuyuan disclosed details of their target investment.

Ctrip, China’s biggest online travel booking site, was planning to partner with Juneyao in the investment, one of the sources said. The source also said that Zhejiang Giant Group, a machinery-to-hotels company owned by Shi Yuzhu, who is known for his melatonin products, was also considering investing in HNA. While Ctrip said it had no comment on the matter, Zhejiang Giant Group did not reply to emails or calls seeking comment.

“In addition to HNA’s potential return on investment [after the restructuring], the most important benefit for investors is that they can get involved deeply in the development of the Hainan free-trade port, which will come as a dowry [offered by the government] with HNA’s restructuring ,” said Qi Qi, an associate professor at the Guangzhou Civil Aviation College. “Companies like Juneyao and Fosun want to get involved because they have capabilities in a variety of sectors including tourism … and have the ability to integrate resources and monetise these benefits.”

Liaoning Fangda Group, a conglomerate with businesses ranging from steel and health care to property, quietly established the Hainan Fangda Aviation Development Company mid-June. The company’s operations cover aviation transport, management and operation of airports, pilot training and more. JD.com and Ping An Insurance Group were also considering a possible investment in HNA, Bloomberg reported on April 30.

HNA Group has been deep in debt over the past several years, since Beijing cracked down on highly-leveraged overseas acquisitions by some Chinese conglomerates. The group has been selling assets to pay down debt and maintain operations, but has been battered by the coronavirus pandemic. The embezzlement of funds at three HNA units by the parent company amounting to US$10 billion has complicated the restructuring. If the exercise fails, it will result in a final declaration of bankruptcy by the courts and liquidation.

HNA and interested buyers are likely to wrap up the deal as soon as possible in case of a liquidation, said Edward Tse, CEO of Gao Feng Advisory. “The worsening of the pandemic may not impact the deal itself that much, but may affect the valuation,” he said.