FT : The mystery document holding up China’s sale of Anbang hotels

The mystery document holding up China’s sale of Anbang hotels
A legal fight over the ownership of US assets threatens to embarrass the Chinese Communist party

When South Korean asset manager Mirae pulled the plug on a $5.8bn hotel deal with China’s Anbang in April, it looked like one more casualty of the coronavirus outbreak. The acquisition agreed in September 2019 had dragged on into the pandemic, which has devastated the hotel industry. Mirae’s last-minute termination of the deal in April led to accusations from Anbang that the buyer “got cold feet”.

But a previously undisclosed document — revealed in a US court by Mirae, part of its defence in a suit brought by Anbang — suggests the pandemic was just one element of why it walked away from the purchase of 15 hotels including the JW Marriott Essex House overlooking New York’s Central Park and Four Seasons and Ritz-Carlton resorts in California.

The document reveals competing claims of ownership on the hotels, which were stripped from Anbang’s former chairman Wu Xiaohui by Chinese authorities in 2017. Purportedly signed by Wu, the Delaware Rapid Arbitration Act agreement, or DRAA, appears to be an attempt to transfer ownership of the hotels from Anbang to four Delaware-based parties, and also give his own family a claim to the assets, just weeks before he was detained in China in June 2017 on corruption charges.

At the time he was arrested Wu was the most high-profile tycoon to be ensnared in President Xi Jinping’s anti-corruption drive. Anbang was once considered the darling of Chinese M&A, launching an $18bn buying spree between 2014 and early 2016. Along with a small cohort of other acquisitive conglomerates such as HNA and Dalian Wanda, its deals were often viewed as part of the Chinese government’s “going out” policy that endorsed overseas investments.

Now Beijing is potentially saddled with billions of dollars in debt from that spending spree and facing a bitter US legal fight over Anbang’s assets that threatens to embarrass the Communist party’s top leadership. Among those who have been drawn into the legal fight is the family of the late Communist party leader Deng Xiaoping — who opened up the economy in the 1970s. A granddaughter of Deng became Wu's third wife.

“The politics behind Anbang got very complicated for Xi Jinping, mainly because there are other powerful families with interests in the company,” says one person close to its senior management. There has been a continuing internal fight over the company assets since Wu’s arrest, the person adds.

Anbang and bust
The sale of the hotels to Mirae — which won a hotly contested auction involving 17 bidders, including private equity firms Blackstone and Brookfield — was supposed to be one of the last large disposals of Anbang’s financial and property empire. The transaction would have helped reduce its debt, to the relief of Beijing regulators, who had already given the leveraged insurer a $10bn state bailout.

Founded by Wu as a small insurance group in 2004, Anbang was from the beginning a one-man show. But the one man at the heart of it — a former car salesman from Wenzhou — proved to be erratic.

The company underwent rapid expansion after 2011 with its by then billionaire owner quickly garnering a reputation as the country’s most prominent dealmaker. In a matter of months in 2015, it bought Dutch insurer Vivat and a large stake in South Korea’s Tongyang Life.

By 2016, Anbang held insurance and real estate assets spanning the globe. That same year, Wu was involved in a bitter battle with Marriott to buy Starwood Hotels, at one point offering $14bn for the chain only to abruptly withdraw the bid without explanation days later.

But the company was not built on a solid foundation. Chinese investigators alleged in 2017 that the company’s founder had been injecting insurance premiums into Anbang to artificially inflate its stock, bolstering the size of the group and fuelling his buying spree.

The same year — and with pressure mounting on his business empire — the Wu signature and seal appeared on the DRAA, apparently giving his family and that of former Communist party leader Deng claim to billions of dollars in California hotel properties, in the event of Beijing seizing control of Anbang. The existence of the DRAA — dated May 15 2017 — was not widely known until April of this year.

Much of its content focuses on trademark disputes. But a clause towards the end of the 16-page document states that, in the event that Anbang is seized by China’s insurance regulator or other government entities, the Wu and Deng families “unconditionally agree to have the four parties of the United States to sue and file an additional complaint against the institutions”.

The “parties” are Delaware-based shell companies and their ultimate owners are unknown. Court records show they have had dealings with Anbang for several years. The Financial Times has tried to contact people linked to the document, but none has responded to inquiries.

Travis Laster, the vice-chancellor of the Court of Chancery in Delaware who will be the judge when the case between Anbang and Mirae resumes in August, recently said of the “parties”: “Those folks have vanished into the ether. It may be because they never existed in the first place. It may be because they are fraudsters. It may be because they are somewhere in China. I don't know.”

The document also warns that the DRAA is confidential and may not be leaked: “In particular, to Xi Jinping’s family, [then anti-corruption chief] Wang Qishan’s family and other families of members of the Standing Committee, or any personnel from the central government, any law enforcement personnel, and other personnel, lest that relevant personnel be subject to criminal liability or death penalty”. The document adds that any party that contravenes the agreement could be liable for a penalty of up to $270bn. Wu once described Wang to the FT as his biggest enemy.

Just three weeks after the DRAA was signed, Wu was arrested in Beijing and eventually sentenced to 18 years in prison.

Former aides say Wu was normally reluctant to sign documents, which has led some in Anbang to question the authenticity of the DRAA. Anbang legal representatives in the US have sought to portray the DRAA as a fraud, saying that Mirae is using it as an excuse to break the deal, and on Wednesday asked the Delaware court to dismiss the document from the case.

Adam Offenhartz, a lawyer at Gibson, Dunn & Crutcher, representing Anbang, said in a May 8 hearing: “I find it remarkable that Mirae, an international company with billions of dollars under its management wing, with billions of dollars of investments, is basically cloaking itself with the cloud generated by these fraudsters.”

Anbang executives in China did not formally respond to emailed questions and requests for interview about the document.

The DRAA also bears the seal of military commander turned entrepreneur Chen Xiaolu. Chen, a so-called princeling, was the son of Chen Yi, a revered revolutionary who served as mayor of Shanghai during Mao Zedong’s era. The younger Chen also served in the military but later moved into business, becoming a director at Anbang, though he was never formally on the payroll. He left the company in 2016, months before the DRAA was drawn up.

Chen died of a heart attack in February 2018, after being questioned by Chinese regulators about his role in the insurer and the extent of the compensation he might have received from Wu, Anbang insiders say. Mr Xi sent a relative to the funeral service, who gave a short speech in which he described Chen as an elder brother to the Xi family, they add.

According to a February 2020 letter by DLA Piper sent to Anbang’s current owner, the Chinese state, it was Chen’s idea to shift the ownership of at least some of the hotels from Anbang to the Wu and Deng families. In court filings the law firm said it had been engaged by other parties to the DRAA to explore potential claims against Anbang but it has subsequently withdrawn from the case.

The DLA Piper letter notes that Wu’s signature on the DRAA “appears to match the signatures on Anbang Insurance’s trademark applications filed to the” US Patent and Trademark Office. Yet it is not identical “so as to be a cut-and-paste copy”.

The uncertainty over the ownership of the hotels was enough to trigger Mirae’s refusal to close the purchase in late April.

“Once those litigations and related matters came to light within days of the . . . closing, the title insurers refused to unequivocally insure [Mirae] as the sole owner of the properties, and the lenders, several of the world’s leading financial institutions, were unwilling to provide the $4bn in financing needed to close,” according to Mirae’s counterclaim against Anbang.

Unpicking the M&A spree
The DRAA’s existence also poses problems for China’s banking and insurance regulator. The CBIRC took control of Anbang in February 2018 with a mandate to dispose of its overseas assets, reduce its mountain of debt and withdraw from the insurer, now renamed Dajia, within two years.

Anbang’s management hired investment bankers to sell off its offshore assets. The priority was to find a buyer for the hotels, all under the Strategic Hotels & Resorts brand which Anbang had initially purchased from Blackstone in 2016 for $6.5bn.

A senior CBIRC regulator, Luo Sheng, was put in charge of the process despite having limited overseas experience to deal with complicated transactions such as the legal dispute with Mirae. Despite early successes — such as the sale of the Fidea Belgian assets for $543m — it quickly became clear that unpicking Anbang was going to be a complex process for the regulator, which declined to comment for this article.

Problems surfaced even before the deal was signed in September 2019 when Mirae discovered grant deeds — separate from the instructions in the DRAA — that purported to show that ownership of six Californian hotels, including a Four Seasons in Silicon Valley and a Ritz-Carlton in Half Moon Bay, had already been transferred to other unrelated parties, according to legal documents reviewed by the FT. But Anbang reassured Mirae that it could expunge what it said were fraudulent titles, and later cleared most of the six.

But with competing claims on some of the properties, the title insurance companies refused to provide the unconditional cover required for lenders to finance Mirae’s $5.8bn purchase. The Korean group had already paid a $581m deposit to Anbang and a $50m fee to its bankers.

On February 24, Mirae’s leading lender Goldman Sachs alerted the South Korean company that its counsel Cleary Gottlieb had found that in addition to the disputes in California, Anbang’s remaining nine properties faced similar challenges in court in Delaware.

Mirae’s lawyers now argue that Anbang deliberately failed to inform it of the competing ownership claims, fearing that such a disclosure would have sunk the deal. “It’s like someone pulled the emergency break,” says a person involved at the time.

“The discovery of the Delaware matters was a shock (and embarrassment) not only to Buyer, but to the title insurers and the lenders, who immediately pulled their commitment letter and demanded a full explanation,” Mirae said in a lawsuit against Anbang.

Gibson, Dunn & Crutcher, Anbang’s lawyer, says the insurer was not obliged to inform Mirae of the DRAA and only made it available to the South Korean group 24 hours before the transaction was scheduled to close.

Anbang continues to contest Mirae’s right to walk away from the deal to buy Strategic Hotels, whose value has almost halved from the $6bn it reached less than a year ago. But there is no obvious alternative buyer even at a substantial discount.

“The legal quagmire that is emerging is going to make it very hard, even for the most aggressive buyer of distressed assets, to make a move,” says one investor familiar with the properties.

Legacy problem for Beijing
If Anbang fails in its case against Mirae, it and the Chinese state could be left holding billions of dollars of debt — used to buy the properties in the first place — with no obvious way to repay it. “This isn’t the best environment,” says one investor familiar with Anbang’s original purchase of the hotels. “That debt will have to be restructured. It will take years.”

Even those who have dealt with both the company and regulators in the past, such as Blackstone and JC Flowers, say they are not interested in these assets, according to people close to the private equity groups. Nor is it clear where Anbang will get the money to complete the promised multibillion-dollar renovation of Wu’s most famous acquisition, the Waldorf Astoria, which he bought in 2015 for $1.95bn.

Wu’s downfall signalled a larger shift for corporate China. In 2017 and 2018, several aggressive conglomerates began unwinding tens of billions of dollars in global investments. China’s global mergers and acquisitions footprint has already shrunk dramatically outside the technology sector.

China itself no longer has massive funds to recycle to the rest of the world. Failure to close the Anbang hotels deal or finding a new buyer, however, could seriously dent its capacity and that of Chinese companies to be taken seriously in developed markets for years to come.

“Chinese buyers are no longer considered the buyer of first choice,” says one investor with experience of the market. “Whether as buyers or sellers, they have lost credibility.”

FT : Why Europe may never follow the US airline industry’s path

Why Europe may never follow the US airline industry’s path
The market is still highly fragmented but governments are often unwilling to let national carriers disappear

Until not too long ago, investing in the airline industry was viewed by many as not much better than setting fire to money. 

Such has been the pain suffered by generations of operators and their shareholders that rueful observations by several high-profile investors have almost become business clichés.

How do you become a millionaire, quipped Richard Branson? Start as a billionaire and buy an airline. Warren Buffett wrote in Berkshire Hathaway’s 2007 letter to shareholders that “if a farsighted capitalist had been present at Kitty Hawk [the site of the Wright Brothers' first flight], he would have done his successors a huge favour by shooting Orville [Wright] down”.

Indeed from 1960 to 2000, the aggregate profits of the US airline industry would have been enough to pay for the delivery of just two 747 jumbo jets. Then, after the 2008 financial crisis, things changed. A wave of mergers between US airlines resulted in rapid consolidation.

As the market became less fragmented and operating models leaner, it started to appear that the US airline industry would become reliably profitable for the first time in its history.

Operating margins moved from negative to positive. Shares in Delta Air Lines rose fourfold from the start of 2009 to the start of 2015. United rose by more than 5.5 times. The “Great Consolidation” had occurred, and even Mr Buffett came to decide that — this time — things would be different. In 2016, in a move that shocked his acolytes, he bought stakes in the four largest US airlines.

Investors came to believe that a more consolidated industry would behave in a more predictable fashion and that the remaining operators would refrain from brutal price wars that flooded the market with seats and cheap tickets. If they all kept in line, all would benefit.

Over recent years, investors and analysts in European airlines have eyed the transformation in the US and started to dream that, maybe, the same Great Consolidation could be possible across the Atlantic.

Unlike in the US, market share in Europe is still highly fragmented, with incumbent formerly state-owned airlines competing with big low-cost carriers such as Ryanair and easyJet, and other smaller ones.

Mark Manduca, an analyst at Citi who has long believed that European airline consolidation is inevitable, noted at the start of this year — before the pandemic hit — that there was increasing evidence of capacity growth slowing in European short-haul, and a widening gap between stronger airlines and weaker ones, which would end up failing or being merged.

“Simply put,” he wrote at the start of the year, “in European aviation history we have yet to see a period (such as now) when four airlines control so much of the profits of the industry”. These “Big Four”, Air France-KLM, IAG, Lufthansa and Ryanair, would increasingly take market share from a “subscale tail” of lossmaking airlines, and the industry would start over the next five years to follow what happened in the US.

The industry crisis caused by the pandemic has reminded investors of all the most ugly things about the European airline sector. So-called “barriers to exit” in airlines have always been very high, with operators having to make such huge capital outlays that they are often compelled to run flights even if they are lossmaking, just to keep cash flowing though the business in the short term.

In Europe the situation is worse, because governments are often unwilling to countenance their national carrier disappearing. No matter how much money Alitalia loses, for example, no Italian government has considered it acceptable simply to let it fail.

The frustrations of Ryanair’s Michael O’Leary, who last month accused German rival Lufthansa of “hoovering up state aid like a drunken uncle at a wedding” is a pained acknowledgment that European government cash is vastly distorting for the sector. It also makes further mergers complicated.

In the wake of the crisis, as Mr Manduca of Citi has noted, short-haul capacity will contract. Some weaker airlines are in difficulties. The strong, such as the “Big Four”, and some others will survive and likely, in time, become stronger. The problem in the short term, is the likely price war that will break out as people start flying again this summer.

This is good for consumers, obviously. But for investors, Europe’s Great Consolidation looks likely to be postponed for many years, while the more profitable future they have been dreaming of remains elusively over the horizon.

FT : Bad things happen when finance front-runs the economy

Bad things happen when finance front-runs the economy
Governments need to ensure durable growth that benefits more than the well-off in society

For most of the last 15 years, the US economy has relied on a mix of public and private finance to liquefy financial markets, boost asset prices and drive economic growth.

What used to be a sequential process — private sector credit factories at full force during the good times, and massive injections of liquidity from the public sector during the more difficult times — has evolved into a simultaneous one. The resulting explosion in leverage has been cheered by markets and most economists, for now. But it will become a lot more problematic should finance’s front-running of the economy not be validated by strong growth that is also inclusive and sustainable.

Let us start with how we got to the great disconnect between economic and corporate fundamentals and appetites for risk, on the part of both providers and users of debt financing.

Going into the global financial crisis in 2008, private sector credit creation had operated in turbo-charge mode. In addition to buoyant issuance of bonds, there was a very rapid rise in securitisation, which found new ways to lever corporate and household balance sheets while reducing barriers to entry for creditors. But the whole process got carried away, resulting in excessive and unsustainable risk-taking by borrowers and lenders.

As the private sector went into a disorderly mode of deleveraging during the crisis, the public sector had no choice but to step in and do whatever it could to avoid a depression. Government debt and the Federal Reserve’s balance sheet soared — accompanied by assurances from officials that this growth would be reversed once economic growth recovered, and once the private sector had completed its de-levering in an orderly fashion. 

But exiting this regime proved difficult in the post-crisis years. A premature attempt to limit government deficits undermined growth, adding to households’ economic insecurity — especially as the benefits of the meagre growth flowed to the better-off segments of society. Rather than reduce its balance sheet, the Fed felt compelled to expand it, waiting for an elusive policy handoff to those more able to deliver genuine and durable economic growth.

Meanwhile, the private sector went on a borrowing binge as Fed-repressed interest rates encouraged and enabled not only the funding of operational expansion but also — in a much bigger way — the buying back of stock, the paying of high dividends and the pursuit of mergers and acquisitions. Then came the Covid-19 shock to the economy and markets.

Facing a new threat of depression, the public sector pivoted to a “whatever it takes” paradigm. The Fed’s balance sheet exploded — almost doubling to near-$7tn in less than a couple of months — as did US government borrowing, rising by an extra 15 per cent of gross domestic product.

The scale of such policies was once considered unthinkable. To overcome the risks of market malfunction and a credit freeze, the Fed is now underwriting not just liquidity risk and credit risk for high-quality companies, but also the risk of default in the junk-bond market. Fiscal measures have included sending cheques to US households as part of a broad-based relief effort.

The immediate impact on financial markets has been beneficial, and has extended well beyond the remarkable recovery in stocks that drove the Nasdaq Composite through the 10,000 mark for the first time on Tuesday and had the S&P show gains for 2020. Corporate bond issuance has been setting new records, as have inflows of investors’ funds into credit markets, despite very low yields. The spillover effects include more than $300bn of emerging-market bond issuance in the first five months of the year, exceeding levels for the same periods in 2018 and 2019.

This huge rise in financial leverage will prove advisable and sustainable if, and only if, economic growth picks up quickly and validates it. In such a scenario, companies’ and countries’ use of debt to bolster cash buffers and offset massive revenue shortfalls would be deemed to have been a wise way to avoid temporary liquidity problems turning into a crippling solvency risk.

But if growth disappoints, the economy and markets will have to cope with a massive debt overhang that results in even greater central bank distortions of markets and lower growth potential. There will be widespread debt restructurings too, and disorderly non-payments.

Given that this nascent economic recovery is subject to significant uncertainty, the answer is not to quickly de-lever balance sheets. Instead, there is a need for an evolution in approaches. Governments should ensure a stronger foundation for high and durable growth that benefits more than the well-off in society, and investors should be more disciplined in minimising exposures to bankruptcy risk and capital impairments.

Lastly, companies need to resist the temptation to use debt for more financial engineering and higher executive pay.

>>> US After Hours Summary: GRUB finalizes deal to be acquired by

After Hours Summary: GRUB finalizes deal to be acquired by TKAYY; OXM -10.1% falls on earnings; HTZ -14% extends weakness after the close

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: NLY +5.2% (guides Q2 above consensus, lowers dividend by 12%)

Companies trading higher in after hours in reaction to news: ZYXI +8.9% (to join S&P SmallCap 600), NOG +6.6% (to acquire 320 acres of core Williston Basin properties), GRUB +6.3% (Just Eat Takeaway.com to acquire GrubHub $75.15/share in all-stock deal - CNBC)," PSNL +3.5% (partners with Berry Genomics for expansion in China), PFSI +3.1% (approves repurchase of 6,975,323 shares from BlackRock Foundation at $34/sh), CBOE +0.2% (authorizes additional $250 mln to its share repurchase program)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: SRT -13.8%, OXM -10.1%

Companies trading lower in after hours in reaction to news: MBIO -22.4% (stock offering), HTZ -14% (extends weakness), ROAD -8.7% (announces 5 mln share offering), CNNE -6.5% (announces 11 mln share offering), ZEN -2.7% (COO resigns; also announces $1 bln convertible offering), BYD -2.4% (to reopen properties in Indiana and Ohio), PACB -2.2% (files for $250 mln mixed securities shelf offering), CIM -1.1% (lowers dividend), CTLT -0.9% (announces $550 mln stock offering), F -0.5% (issues two safety recalls)

FT : PSA and Fiat-Chrysler face exhaustive antitrust probe over merger

PSA and Fiat-Chrysler face exhaustive antitrust probe over merger
The groups are set to miss a deadline to allay concerns about their strong position in the van market

The $50bn merger between France’s PSA and Italian-American Fiat-Chrysler faces a full-scale antitrust probe after the two companies failed to provide concessions to EU officials, according to people with direct knowledge of the situation. 

PSA and FCA, which plan to create the world’s fourth-largest carmaker, faced a deadline of Wednesday evening to allay concerns in Brussels about their combined might in the highly lucrative small van segment.

The combined van units would give PSA-FCA a third of the European market, more than double the 16 per cent of Renault or Ford, the two closest competitors.

However, the companies have been reluctant to sell the divisions, which are highly profitable, according to three people familiar with the negotiations.

People with direct knowledge of the EU probe said that during the lengthier phase, which will last four months, the companies must either sell all or part of the division or appease competition concerns through other means. 

But the deal is expected to be cleared eventually by EU authorities and the firms had already priced in a more taxing probe given the size of the deal, these people added. 

PSA and FCA already have a joint venture producing some light commercial vehicles in Europe.

Scrutiny of the van divisions had been expected going into the deal, which was announced formally in December and is expected to close in the first quarter of 2021.

If it closes, the deal will catapult the two businesses past rivals including General Motors and Hyundai-Kia to become a 9m-a-year manufacturer, with strong positions in Europe and North America and one of the most profitable vehicle line-ups of any carmaker globally.

While the deal needs to clear antitrust hurdles in other markets such as Latin America, Europe is the region where the companies have the greatest overlap.

The European Commission, which needs to decide on the merger by next week, declined to comment.

Representatives from FCA and PSA declined to comment.

Separately on Wednesday, PSA said that the Vauxhall Ellesmere Port car plant in the UK will not reopen until September.

The plant, which produces the Vauxhall and Opel Astra, has been offline since March. The Astra model is also made in Gliwice in Poland, which restarted production on Monday.

PSA was the first major group to close all European factories, and consistently said it will not restart its operations until demand recovers.

Some Ellesmere Port workers will be redeployed to PSA’s Luton van plant, which restarted in May and is about to add a third shift to increase output because of strong demand.