The $170 Billion Collapse of China’s HNA Group
at its peak China's hna group presided over an estimated 170 billion dollars of assets across the world the conglomerate was a big shareholder in Deutsche Bank and Hilton Hotels they owned airports and other real estate in Germany China and the United States and they had the third largest aircraft leasing business in the world owning over 900 planes most amazing of all h a bought virtually all of this in just a few years by the time the party ended in May 2017 the company was doing at least one multi-million or even billion dollar transaction each month and then as fast as it came up it all came crashing down in this video we're going to talk about one of the biggest and craziest implosions in corporate history but first let me talk about the asianometry patreon Early Access members get to watch new videos and see selected references for them before their release of the public it helps support the videos since views are so volatile I appreciate every pledge thanks and on with the show Chinese companies are Infamous for their murky early histories and opaque ownership structures the southern Chinese island of Hainan is about as large as Taiwan but has a much smaller population of about 9 million people until 1988 the island was a special administrative region within the Guangdong Province but in 1988 the central government made Hainan into its own Province and designated it as a special economic zone to try and generate more investment the new Hainan provincial government had a formidable task ahead of it much like Taiwan Hainan was a historical Backwater a hotbed for bandits in the 1920s how were they going to get people to come that same year the central Chinese government began deregulating its airline industry it restructured its former National Airline Monopoly into six individual Airlines across the country another measure of that was to allow private Public Partnerships between provincial governments and private companies to allow these provinces to establish Regional Airline carriers of Their Own so the Hainan government contributed 10 million RMB of startup Capital to start high non-provincial Airlines but the company did nothing with it after that never acquiring an airplane or even a civil license tan Fung was the son of Communist Party officials and served in the people's Liberation Army Air Force after that he worked in China's civil aviation regulator the caac there he met a variety of people who would go on to also work at hna group including co-founder Wong Jen then moved to China's national air regulations Bureau and won a scholarship to study air transportation Logistics at a school in Germany but when he came back he found the bureau abolished so he worked at the agricultural Investment Trust of China and then the world bank loan office in haiko hainan's capital city it is worth noting that the powerful Wong to song anti-corruptions are in Xi Jinping Ally served as the agricultural Investment Trust of China's chief executive while Chun was there rumors exist of a deeper connection of course but there is nothing solid here Wong was only there for a year after all anyway while tan was at the loan office a former colleague of his from the civil aviation regulator then recruits him to manage this Airline at the time bogged down with little progress 10 million RMB or about 1.4 million dollars is nowhere near enough to run an airline or even buy a plane thusly ton and his colleague convinced the local government to reboot the business has a joint stock company this relatively new development in China allowed private individuals to take share in this state-owned Enterprise in 1993 High non-provincial Airlines restructured as a corporation and was allowed to sell shares the sales raised 250 million RMB or about 35 million dollars from 122 stakeholders that may the airline began operations in these early days h a established a dual chairman structure co-founder and partner Wong Jen managed the company's Internal Affairs in strategic Direction he stayed much more in the shadows Tung Fung on the other hand served as the company's external Communications man much of the time he was running around telling stories to Banks and potential investors to raise money 35 million dollars sounds like a lot and I certainly wouldn't mind having that in my pocket but in the airline world it is chump change so Chun and his team went to the banks which lent him another 600 million RMB or 84 million dollars but on what collateral in these early days Chinese Banks did not know much about how mortgages should work Chun told the banks that the money would be used to buy a plane a Western Bank would then ask to have a claim on that plane like how a Residential Mortgage is backed by a house but the Chinese Bank didn't do this rather they assigned the planes property rights to the borrower h a group this allowed h a to turn around and re-mortgage the purchase plane again to another bank for even more money Chinese Banks eventually caught on but hna never failed to get creative in the way they borrowed money one remortgaging tactic they used was to borrow against the future revenue streams from the plane's air routes so every plane was mortgaged twice first as a hard asset backing a loan second with his future revenue streams how does that work not sure anyway this one plain two meal approach allowed hna to double dip their leverage and grow very fast playing bank loan terms are very long-lived 10 to 15 years which gave h a plenty of time to figure out how to pay back those loans but you don't need me to tell you that it is a perilous way to scale a business many times the only way to pay back that loan was to take out another loan down the line in 1995 Chun flew to New York City and pitched hedge fund manager George soros's Quantum fund there he talked about hainan's development prospects as well as the high Market potential for airlines in China convinced Sorrows invested 25 million dollars it was the first chinese-american joint venture in the China Aviation Space ton later said that the investment and soros's reputation helped boost the startup airline's image when Hainan Airlines later listed on a Shanghai stock exchange the quantum fund owned vehicle American Aviation LDC was reported as its largest shareholder with 21 percent in 2005 Soros doubled his investment to 50 million dollars using a share swap to acquire a 10 stake in an unlisted unit of h a group altogether their ownership was said to be worth something like 110 million dollars the New York Times reported that the quantum fund sold at stake in 2011. one of the reasons why they did so was hna's lack of corporate transparency and governance the company is infamously complicated and opaque at the IPO co-founders tun Fung and Wang Jin personally held a minuscule stake ton with 32 000 shares and Wong 28 000 but the two controlled another shell company with enough shares to be the second largest shareholder since then the group's ownership structure has shifted around but has always remained extremely murky from 2002 to 2015 hna groups controlling shareholder was a high non-airlines Trade union then it was replaced by a non-profit called the Hainan tahang charity Foundation h a founded the charity in 2000 with a shared donation worth 20 million RMB the foundation is said to support anti-poverty efforts but it does not seem to do much and employs a variety of company friends and family members in all likelihood it is a stealth vehicle through which ton can control the company serving on a sham Foundation was not the only way the co-founders friends and family profited from hna chun's little brother set up an American firm to buy engines and spare parts for the airline's Fleet and the airline hired Wang Jin's little brother Wong Wei to help build high-end Oceanfront Villas and a golf course at haiko these deals and others eventually made him a billionaire in 1997 Hainan provincial Airlines renamed itself to a Hainan Airlines a year later it established Hainan H A Holdings the predecessor of what would eventually become hna group by the late 1990s China's Airline situation was a bit messy there were over 30 carriers in the country at the time and they were all losing money some consolidation was required in 2000 China's Civil Air regulator reorganized its state-owned Aviation companies created an oligopoly of three Airlines Air China Eastern and China Southern by now Hainan airlines's Fleet had grown to 31 airplanes but that was nowhere near big enough to compete with the Giants so they arranged marriages with three other small Airlines China xinhua Airlines tangan Airlines and chiangxi Airlines China xinhua Airlines in particular was key in turning Hainan into a national flagship xinhua operated out of beijing's two big airports flying over 80 routes to over 50 cities across China but xinhua also struggled to make money with debt ratios reaching as high as 98 percent so in April 2001 they sold themselves to h a group for about a billion RMB though most of that purchase price was not in cash but real assets like planes the new four-way entity focused on short and medium-range flights serving China's Regional cities outside of the major routes dominated by the state-owned airlines this strategy succeeded and the airlines in 2001 turned a profit but h a then flew headlong into the first SARS epidemic in 2003. the crisis struck the air and travel business pretty hard h a already financially stretched because of its earlier Acquisitions turned a massive loss of 1.5 billion RMB
the company came close to bankruptcy to survive they turned to the high non-provincial government and the government despite having a relatively small Financial stake in the Venture bailed it out anyway in 2005 the Hainan government injected 1.5 billion RMB 10 of its entire Revenue that year essentially saving the airline thanks to its white beaches and tropical weather Hainan gained a reputation as a vacation destination after the 2003 SARS dip the Hainan tourism trade grew steadily over the next two decades h a positioned itself to benefit from those tourists in multiple ways over 40 percent of arrivals to Hainan came on a Hainan Airlines plane they landed at an H a-owned airport stayed at h a owned hotels and were guided around by an H A owned travel agency this diversification is not only a reflection of the company's vertical integration strategy but also an indication of the scope of its Ambitions they were the first Chinese airline to purchase and own their own Airport co-founder Chun Fung said our dream is to turn Hainan Airlines into an international Enterprise which can compete with the world Giants in 2008 the global financial crisis seemed to impede those dreams it wrecked the world economy and caused h a group to fall again to a 1.73 billion RMB loss they attempted to raise funds by ipoing their Airline subsidiary Grand Air China on the Hong Kong stock markets however the difficult Financial Market situation in 2009 made this infeasible the company made it through thanks to two big events first the Hainan provincial government injected another 1.5 billion RMB into the company second has the crisis unfolded in November 2008 the Chinese government announced a 4 trillion RMB stimulus package in it where new infrastructure projects that caused land prices across the country to Skyrocket this included about 9 000 acres of land in haiko that h a acquired when it bought High Coast Airport the airport relocated elsewhere but h a held on to the land ideally positioned in the downtown area for many years this land became immensely valuable on the basis of this development h a sold 4 billion RMB of bonds and 2.8 billion RMB
of stock ending the company's crisis there was one other way hna group recovered by moving company assets between subsidiaries at favorable prices hna can generate a paper profit most notably in 2004 and 2005 two hna subsidiaries including Hainan Airlines invested 600 million RMB to build their HQ kohang building in Beijing at the end of 2007 the subsidiaries transferred the building to hna at cost a year later hna sold a 95 stake in the building back to Hainan Airlines the subsidiary for about 1.7 billion RMB recording a profit of about 1.1 billion RMB but no big deal right just a little light fraud between friends to boost operating results anyway many normal companies would consider this second close call as assigned to shrink and deleverage but hna was no normal company the financial crisis and the recession that followed gave h a plenty of cheap overseas targets to look at hna wanted to take advantage and launch the Super X plan with the goal of accumulating 1 trillion RMB of Assets in just five years from late 2010 to 2017 hna spent billions of dollars to acquire Hotel Brands technology companies Urban real estate and airports this frenzy peaked in the three years from 2015 to 2017 where hna spent 50 billion dollars to make 123 acquisitions these Acquisitions are in wildly different Industries we can try to organize them into a few broad categories and go through them category by category the accounting however is nowhere near complete or comprehensive the first category is the travel industry including Airlines and travel groups some of H A's earliest Acquisitions were airlines in 2006 hna acquired Hong Kong Airlines and Hong Kong Express airlines under their ownership Hong Kong Airlines expanded into cargo shipping and Hong Kong Express tried to build up a low-cost carrier model like the old Hainan Airlines did the Hong Kong purchases gave h a its first International Roots a major step forward later in 2012 came the purchase of a 48 stake in the iGo Acer Airline France's second oldest Cargo Airline it mostly Services North Africa but also gave the company permission to fly into Europe including France Chinese regulations at the time allowed just one Chinese Airline per International route so this was probably them trying to get around that in 2015 h a bought minor stakes in South Africa's calm air and Brazil's Azul now these moves were particularly strange because none of hna's Airlines at the time flew into South Africa or Brazil accompanying its Airline purchases was a 2015 2.8 billion dollar purchase of
Swissport a cargo Handler and a 2016 1.5 billion dollar purchase of gate group a Swiss Airline catering business it makes a lot of sense that h a group would have a great interest in hotels it is in line with their business model and you can re-mortgage the properties starting in 2011 h a started buying into NH Hotel Group a Spanish company that was then Europe's third largest hotel group over time the company raids its state to about 29.5 percent with four board seats the two did a joint venture to build hotels in China the signing ceremony was reportedly attended by premier league and Spain's prime minister Mariano rajoy then in 2016 the company bought Carlson hotels which owns the Radisson hotels brand for an unknown price Carlson and the aforementioned NH Hotel Group are direct competitors in Europe this conflict of interest eventually caused NH hotel to boot H A's four members off their board this was just sloppy work on H A's part why would you not run this purchase by your other Hotel subsidiary but wait there's more in 2016 hna bought a 25 stake in Hilton Hotels from Blackstone Blackstone sold the stake at a price three times higher than what they paid for it back in 2007. the next category of H A Empire Building includes its Logistics and shipping buildup in 2008 hna announced plans to create a global container shipping business with a fleet of 200 ships to back this they bought jinhai Shipyard a shipbuilder and tianjing Marine shipping a marine Shipping Company but the most eyebrow raising acquisition in this sector was tenjing's six billion dollar purchase of Ingram Micro Ingram is a global I.T equipment distributor with over 46 billion dollars in Revenue in 2015.
however the company made just 266 million dollars in net income that year which translates to a profit margin of less than one percent from the very beginning it was a strange purchase in its press release h a explained that they wanted to deepen Ingram micro's involvement in the China and asia-pacific Market twenty percent of Ingram's 2015 Revenue was from Asia just 5.4 percent came from China though China did account for 23.1 percent of the company's total profit but why would a marine shipper buy into what I presume is one of their customers businesses interestingly this purchase fell under regulatory scrutiny by the committee on foreign investment in the United States or cephas cephas approved the deal one of the few such China U.S technology deals to get done in the past decade inspired by GE Finance hna wanted to build up a financial sector arm which they named hna Finance h a finance wanted to do heavy asset Leasing and insurance in 2009 the company acquired the Australian aircraft Leasing Company alko alko lost 1.4 billion USD and collapsed into insolvency during the financial crisis h a bought the company out of liquidation and moved it to Hong Kong there they merged it into a publicly traded affiliate bull High Capital holding bohi would be the corporate vehicle for all their heavy asset leasing efforts in 2011 bohi spent one billion dollars not including debt to buy GE Seco the fifth largest container leasing Fleet GE Seco buys dry Freight refrigerated and tank containers and leases them out then in 2015 bohi bought an 80 stake in Kronos group limited which they merged into Seco to add more scale to their container leasing business a year later bohi paid 7.6 billion dollars to buy the Irish Leasing Company Avalon this made hna the fourth biggest airplane leasor finally in 2017 they purchased CIT group's aircraft leasing business for 10 billion dollars Morgan Stanley financed 8.5 billion dollars of that 10 billion
dollar purchase price altogether the combined company had 910 aircraft in its Fleet and was the third largest such company in the industry and then there are the purchases that do not fit into any of the above categories a 2016 1.1 billion dollar purchase of the land under the former kaitak airport in Hong Kong a March 2017 purchase of a majority stake in the money losing Frankfurt Hahn airport in Germany his first and only International Airport acquisition there was also a 9.9 percent 4 billion dollar Equity stake in Deutsche Bank one of the world's most important financial institutions this was built up in early 2017 through an Austrian firm and a fantastically complicated web of offshore companies the chain is seven companies deep through this web hna claimed itself to be Deutsche bank's largest shareholder and managed a place a representative on the board there was also the 2.21 billion dollar purchase of 245 Park Avenue in New York City which closed in May 2017. one of the biggest transactions in New York City real estate history 1.75 of
the 2.2 billion dollars was borrowed just a month earlier hna closed on the aforementioned 10 billion dollar sit group purchase and announced that they had bought a 16.8 percent and do free group the largest duty-free shop chain in the world gosh so where did all the money for these purchases off made at an elevated price come from the vast majority of the money was borrowed but against what the first major debt source is land and Land Development h a shifted from relying on mortgaging out plane assets to mortgaging out Land Development projects and other hard assets across China provincial and City governments were starting infrastructure projects as per the guidance of the central government for instance in 2012 the high non-provincial government announced that it would build a big business district but many of these governments are quite indebted how do they get the money hna partnered with these governments to do these investment projects leasing them the assets so to help them duck their debt limits h a then spun these various land development projects off into publicly traded subsidiaries the subsidiaries net asset values and thus stock prices Skyrocket hnas management can then pledge these shares to borrow even more money this leads me into the second major funding source a super complex capital structure very early on hna devolved from a traditional corporation that most people would be familiar with to a complex intertwined web of china-based investment entities some of these are privately held but a great deal are public including 10 on the Shenzhen and Shanghai stock markets and seven on the Hong Kong markets has hna acquired entire companies or stakes and companies during its acquisition frenzy even as they borrowed more and more money to acquire it they can inject those Acquisitions into their web and then re-mortgage them out for even more money though the company seems to be run and operated by its Management in the core hna group Corporation the stock ownership and debt ownership links are so complicated that it is hard to tell who owns what I am kind of reminded of a Portuguese man of war that's not a real jellyfish but an agglomeration of smaller creatures they band together as a clump consuming anything in its way the other thing about the Mana War is that it is entirely dependent on the season currents for survival if the waves were to suddenly push this Beast onto the shores they would not survive for very long in mid-may 2017 h a issued 500 million dollars in bonds for its 245 Park Avenue Purchase it would be one of hna's last overseas M A financing transactions on June 22 2017 the China banking Regulatory Commission ordered several Banks to conduct risk checks on the amount of overseas borrowing and investing by hna and other conglomerates like unbang and Dalian Wanda everything changed from there in July 2017 h a subsidiary sherco canceled their in-process purchase of a 34.9 stake of the American in-flight entertainment company Global Eagle entertainment that month it was reported that Morgan Stanley Citigroup and Bank of America stopped taking any more shares of hna group companies has pledges for new loans Goldman Sachs followed suit a few months later in September 2017. that same month
the Hong Kong monetary Authority requested information from h a about its financial status in November 2017 h a issued 300 million dollars of 363-day dollar bonds and an interest rate of 8.875 percent the extremely high interest rate was China's highest ever rate for its class yields on h a debt began to rise then that same month the Chinese central government criticized one of H A's core real estate projects the Sanya new airport Reclamation project for quote suspected illegal use of the sea this shook confidence in the company's vaunted government connections a few days later in late November 2017 h a reported its core financial data the showstopper was H A's estimated current loan balance of 637 billion RMB or 94 billion USD using 2017 exchange rates up 36 percent from the previous year if you were to include the company's unlisted subsidiaries estimates went as high as 1 trillion RMB or 148 billion dollars yet even these estimates fell short of the eventual actual number this made hna group Asia's most indebted company standard and poor and other credit rating agencies rushed to downgrade the company's debt January 2018 began with a series of reversals h a management met with its creditors they told them the company planned to unwind its build up and return to its core Airlines business they would sell 100 billion RMB of Assets in the first half of the year a third of hna's publicly traded Affiliates had their share suspended this included hna's tourism service business bohi leasing its leasing business which had once been the third largest in the world tianjing Tian High the shipping slash logistics company that owns the American I.T distributor Ingram Micro Hainan Airlines Holdings which held the company's original Airline businesses as well as the others it created over the years and ccop group which owns and runs a large chain of retailers like supermarkets and department stores in northern and Central China for some of these companies h a had pledged up to 60 percent of the total share of circulation for loans this had been one of the company's key sources of cash keeping the whole group together throughout 2018 h a began the process of selling off the various assets that it purchased only a year earlier this rapid sell down took place in the midst of great personal tragedy in July 2018 Wang Jin one of H A's co-founders and the inside man said to be running the company's day-to-day operations fell to his death in a tourist area of France he had climbed a wall so that his family can get a photograph of him and then accidentally fell about 15 meters there are some dubious reports that he deliberately jumped off the wall but the French authorities don't seem to believe that Wong's 15 State pass to the American non-profit that now control the majority of H A shares tan Fung's son Tung xiaofong was appointed the new Deputy CEO and the asset sales continued slowly the assets melted away two plots from the kaitak airport site in Hong Kong were sold to Henderson land for two billion dollars a rare recorded gain a bit of the steak in Deutsche Bank sold off in 2019 they are still selling it down today Swissport was swapped away to its senior creditors in August 2020 and the massive Ingram Micro I.T
subsidiary was sold to platinum equity into December 2020 sale it seemed like the company might actually make it through but the devastating effects that kovid had on H A's core Airline and travel businesses sparked a final crisis that the company could not overcome and thus on February 2021 h a finally entered bankruptcy proceedings when the filing came in the company had acknowledged 170 billion dollars of debts from creditors the company will likely be split into four businesses after all the bankruptcy procedures are done and as for tanfong on September 2021 he and his chief executive Adam tan were detained by the Chinese government for suspected crimes in a 2012 investor presentation reported by the financial times a banker tried to reassure potential investors with the following line to Outsiders this seems opaque and confusing but investors should take comfort from close government relationships at many levels both above and within the hna umbrella what held together the whole Enterprise were mountains of debt and the unspoken implication of close government involvement the notion floated around that h a can only have gotten so far borrowed so much and bought so much because it had the backing of or was even a vehicle for the Chinese government this caused a lot of anxiety for people in the West Was it real who knows for sure perhaps on some level hna and his fellow conglomerates did have that approval people have made those claims but one can make an equally strong argument that the company's incredibly complex structure existed for a reason and that was the Dodge oversight at least until it no longer could all right everyone that's it for tonight thanks for watching my thanks to my intern researcher Adam Kim for his work on this um subscribe to the Channel Sign up for the newsletter and I'll see you guys next time
2023-02-24 06:16
