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HNA's US$15B of asset sales provide some relief after liquidity crisis

Under financial and political pressure to reduce its towering debt, Chinese conglomerate HNA Group Co. Ltd. has sold roughly US$15 billion worth of assets since the start of 2018. Thus far, the sales have brought the Hainan-based company temporary relief, but observers say it has much more deleveraging to do before bringing its debt to a sustainable level.

HNA, which owns businesses in the property, aviation, finance, logistics, retail and tourism sectors, was one of China's most aggressive overseas shoppers between 2016 and 2017, making about US$50 billion worth of acquisitions, including commercial properties and large positions in a variety of companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG.

HNA borrowed heavily to make the acquisitions, and its total debt at year-end 2017 stood at 736.50 billion yuan, up 22% from 603.50 billion yuan a year earlier, according to its 2017 annual report. Chairman Chen Feng disclosed in January that the company faced a potential cash shortfall of at least US$2.40 billion in the first quarter, and it has been struggling to cover debt payments. At the same time, the Chinese government embarked on a nationwide deleveraging campaign, increasing scrutiny of companies' debt levels.

Since the beginning of 2018, HNA has sold domestic and foreign commercial real properties; stakes in hotel operator Hilton Worldwide Holdings Inc. and its spinoffs Park Hotels & Resorts Inc., a real estate investment trust, and Hilton Grand Vacations Inc., a timeshare operator; and its holdings in Amsterdam-based logistics company TIP Trailer Services and Deutsche Bank AG. The group is also marketing additional properties for sale, including assets in New York and London, according to media reports.

HNA's real estate portfolio as of April spanned 27 markets in eight countries in Asia-Pacific, North America and Europe, with a combined estimated value of US$14.40 billion, according to Real Capital Analytics.

HNA Group spokesman Sam Li declined to comment on the aggregate sales figure and the company's future asset sale plan.

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The selling spree appears to have partially eased the company's refinancing risks, analysts said. "Our view is more optimistic than before," Tony Chen, a credit analyst at Nomura Holdings, said in an interview. "The company has shown its determination to sell off assets to cut leverage [in the past few months]."

HNA has also been bolstered by support from major domestic Chinese banks, including China Development Bank and the Industrial and Commercial Bank of China. HNA said in late 2017 that it had more than 800 billion yuan in credit lines from domestic financial institutions, of which 310 billion yuan was unused.

"The only reason HNA is still alive today is [because of] Chinese banks' support," said Warut Promboon, managing partner at Asian independent fixed-income research firm Bondcritic. The support is "solid and substantial," Huatai Securities Chief Financial Analyst Chen Shujin said.

Despite frequent media coverage questioning the health of HNA's business, Chinese banks are not planning to withdraw loans from the company, Chen said, citing a survey Huatai conducted with several domestic banks. The banks believe HNA's default risk is not high, given that the group still holds many valuable assets and so far has not had to dispose of them at a discount, she said. "There is no insolvency."

Moreover, analysts said that Beijing has been relatively gentle in its approach toward HNA, giving the company plenty of time to reduce its debt and keep itself afloat, rather than announcing a harsh government takeover of its operations, which it meted out to Anbang Insurance Group Co. Ltd. in February. The government's more amiable stance toward HNA would have sent a signal to local banks and given them the confidence to forge ahead with loans for the conglomerate.

Liquidity concerns linger

Despite the banks' support and the company's deleveraging progress to date, analysts believe liquidity remains an urgent issue for the company, and it must continue to sell assets.

"It's all about how fast HNA can push its asset sales," Nomura's Chen said.

HNA has about US$13.00 billion worth of U.S. dollar bonds and US$18.00 billion of onshore yuan-denominated bonds, according to UBS data. In particular, 22% of its offshore bonds will mature in 2018, as will 14% of its domestic bonds. S&P Global Market Intelligence data shows that HNA's gearing ratio, excluding minority interests, stood as high as 654% as of June 30, 2017.

Warut added that the recent increase in the U.S. 10-year Treasury yield will put further pressure on HNA's bonds, pushing up its funding costs.

"I don't think they will default this year, but I don't know about next year," he said.

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As of May 30, US$1 was equivalent to 6.42 yuan.