HNA pledged billions in shares to fund buying spree

BEIJING • HNA Group supercharged its transformation from an obscure Chinese airline operator into a juggernaut capable of amassing multibillion-dollar stakes in globally recognised brands, including Hilton Worldwide Holdings and Deutsche Bank.

Now, China's boldest dealmaker, with over US$40 billion (S$55 billion) in acquisitions spanning six continents, faces growing regulatory scrutiny from Beijing that could spook bond investors and raise HNA's financing costs when most of the shares pledged to fund its buying spree are declining.

If the value of its collateral falls enough, HNA could be forced to sell its holdings to repay debt.

Privately held HNA declined to provide a complete accounting of its share pledges, but data from regulatory filings compiled by Bloomberg provides an unprecedented look at the firm's exposure.

HNA and its units have pledged at least US$24 billion in shares across 15 publicly traded firms, including the Hilton and Deutsche Bank stakes, filings show. HNA-related entities have pledged billions more in unlisted assets.

Shareholders pledged a 17 per cent stake in the group's closely held parent, according to government filings.

"Whenever your share pledges increase, especially with respect to ratcheting up debt, I would say it increases risk," said adjunct professor of finance David Yu at New York University Shanghai. "The question really becomes, 'At what point is it too much?' "

There is nothing inherently wrong with share pledges or collateralised borrowing. Both are common forms of financing, particularly in China, where about 10 per cent of the country's stock-market value has been pledged for loans, according to a report in January by Mr David Cui, a China equity strategist at Bank of America.

HNA, founded in 1993 and chaired by Chinese aviation tycoon Chen Feng, said by e-mail that the pledging of shares is not the firm's only financing source. It said its business operations, asset quality and cash flows allow it to pursue a range of financing options.

HNA recently told parties involved in its deals that it is putting mergers and acquisitions on hold, reported The Wall Street Journal on Thursday.

The scale and complexity of HNA's approach to equity-backed borrowing raise questions about how it will manage its leverage across so many businesses, noted credit research analyst Carol Yuan at Aberdeen Sydney, who has studied HNA bonds.

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A version of this article appeared in the print edition of The Straits Times on July 15, 2017, with the headline 'HNA pledged billions in shares to fund buying spree'. Print Edition | Subscribe