Chinese investor

Deutsche Bank shareholder HNA divests to appease Beijing

HNA Group Chairman Adam Tan Interview
HNA CEO Adam Tan contemplating what to sell next. Source: Christopher Goodney/Bloomberg

In the last two years, Chinese conglomerate HNA has been on a wild shopping spree, agreeing over 80 deals worth more more than $40 billion including stakes in Deutsche Bank and Hilton Worldwide Holdings. But the heavily-indebted group is now changing course, with CEO Adam Tan on Tuesday announcing the sale of some investments and declaring that it will refrain in future from investing in areas not backed by the government, Chinese media reported.

“If the state doesn’t support a sector, we won’t invest in it,” Mr. Tan told a conference hosted by the Chinese business magazine Caijing, according to domestic media. The company has already sold some investments to improve liquidity, he said, and is contemplating the sale of other assets that aren’t active in state-supported industries. “Companies cannot invest chaotically overseas, because chaotic investment creates trouble,” the executive said, according to media portal sina.com.

The change of course follows mounting political pressure on the group. At the conference, Mr. Tan kept stressing how important the stance of the ruling Communist Party was for HNA’s future corporate strategy. But he’s not alone in drawing the party’s ire. It also recently singled out real-estate company Wanda, conglomerate Fosun and insurer Anbang for their foreign investments.

FDP- Bundesvorstand
Former German economy minister Philipp Rösler was hired as CEO of HNA's biggest shareholder. Source: DPA

Still, that criticism isn’t likely to push it to divest its Deutsche Bank stake – earlier this year it became a major shareholder in Germany’s biggest bank with the purchase of a 9.9-percent holding. The stake has not been without controversy, but an HNA insider told Handelsblatt that the company would not sell shares in an investment as good as Germany’s largest bank.

The Chinese investor is estimated to have run up $100 billion in debts, and a number of media outlets have reported that the company is running into payment problems. It recently had to pay an interest rate of 8.875 percent for a 1-year, $300 million loan. In mid-November, Reuters reported that HNA’s Hong Kong-listed subsidiary, HNA Holding, had asked banks to extend a $448 million one-year bridge loan coming due.

The troubles may not be down to poor financial management. Rather, the HNA insider said Chinese banks are hesitant to make loans counter to government wishes. Although the insider said HNA would be able to meet its obligations with little effort, the banking decisions may pose similar problems to many other companies.

It’s hard to assess how vulnerable HNA’s leverage is because the company’s structure is too complex and opaque

One financial analyst who asked not to be named said it was normal for companies to use newly-acquired capital investments as collateral for further loans. But the government’s criticism has cast a spotlight on HNA. “Since then, sentiment has turned against HNA,” the analyst said. China’s regulators had adopted a stricter stance, pressuring banks into curbing their previously lax lending terms to Chinese corporate investors, the analyst added.

HNA, which Mr. Tan noted posted a 92-percent surge in first-half profit, appears to have little option but to change tack – a welcome move considering the risky scale and pace of its investments. It’s hard to assess how vulnerable HNA’s leverage is because the company’s structure is too complex and opaque, making it unclear who would be liable if it ran into problems.

Critics said the company urgently needs to become more transparent and to clarify how close it really is to the Chinese government. The appointment of a former German economy minister – Philipp Rösler – as chief executive of Hainan Cihang Charity Foundation Inc, HNA’s largest shareholder, is seen as an important first step towards establishing that transparency.

Sha Hua is a correspondent for Handelsblatt in Beijing. Daniel Schäfer is head of Handelsblatt’s finance pages and is based in Frankfurt. To contact the authors: hua@handelsblatt.com and dschaefer@handelsblatt.com 

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