HNA Group offers high interest payment as funding pressure builds
Chinese conglomerate is offering to pay 11% to 12% for one-year financing
Acquisitive Chinese conglomerate HNA Group is offering unusually high interest payments for short-term financing, in the latest sign that the company faces a cash shortage.
Three intermediaries who market banker’s acceptances (BAs) for clients seeking to raise cash told the Financial Times that HNA is willing to pay 11 to 12 per cent for one-year financing, far higher than typical rates for high-quality Chinese borrowers. Two of them said that in mid-2017, comparable bills were yielding only 7.5 per cent.
The high yields are another sign that HNA — which has agreed to $40bn of acquisition deals since 2015 and is the largest shareholder in Deutsche Bank and Hilton Worldwide — is perceived as risky by potential creditors.
In November, it sold $300m of 363-day bonds in Hong Kong at a rate of 8.875 per cent, the highest ever for a bond from a Chinese company with a maturity of one year or less, according to Thomson Reuters data.
A banker’s acceptance is a short-term credit instrument issued by a company and guaranteed by a bank or financial institution. It is commonly used by groups looking to shore up their cash needs in addition to borrowing from banks and capital markets.
The presence of a bank as guarantor means that BAs are normally viewed as low risk, regardless of the corporate issuer, and yields are generally low. But in the case of HNA, the guarantor was not an outside bank but another HNA subsidiary, HNA Group Finance. That suggests the ostensible guarantee provides little additional security.
In an interview in December, a company board member said he expected liquidity concerns to ease by the end of 2017. Last month HNA publicised its meeting with eight of China’s largest banks to discuss lending plans for 2018, an apparent effort to reassure markets that the company still enjoys the confidence of key creditors.
But pressure from China’s policymakers who have sought to rein in capital flight and foreign dealmaking is contributing to investor perceptions that HNA’s credit is risky.
“The reason the yield is now so high is that the country is revoking overseas investment in favour of domestic investment. They’ve stopped a lot of foreign activity,” said one intermediary.
In June, China’s banking regulator mentioned HNA alongside three other large, privately owned conglomerates as sources of possible “systemic risk” because of their heavy borrowing to finance foreign acquisitions.
The total amount that HNA is seeking to raise is unclear because the BAs on offer are dispersed among various intermediaries. Three who spoke to the Financial Times are offering acceptances with face values ranging from Rmb500,000 to Rmb50m ($77,000 to $7.7m). One said he could obtain a Rmb100m draft for a buyer who was interested in that amount.
HNA declined to comment.
An interest rate of 12 per cent is high by any standard. The People’s Bank of China’s benchmark one-year lending rate is 4.35 per cent. The benchmark yield on one-year commercial paper rated double A minus — equivalent to junk status in China’s onshore market — was 6.33 per cent on Thursday, according to China’s main bond clearing house.
HNA’s offer price puts its funding cost above even that of China’s peer-to-peer lending market, which is used by small businesses and consumers that cannot access credit from traditional financial institutions.
The average rate on P2P investment products was 9.54 per cent last month, according to Online Lending House, a website that tracks the industry.
Several bills for sale viewed by the FT were issued directly by HNA Group. Others were issued by Beijing Capital Airlines, a small carrier owned by HNA.
Last week, two of HNA’s listed subsidiaries suspended trading in Shanghai pending a big announcement and possible asset restructuring. The subsidiaries are Hainan Airlines, the company’s core aviation business and its major cash flow generator, and Tianjin Tianhai Investment, which owns IT group Ingram Micro.