HonAir’s salvation appears to hinge on CDB

04 January 2019

China Development Bank support appears to be the last hope for HNA Group-affiliated Hong Kong Airlines (HonAir)’s redemption of USD 550m 6.9% bonds due 20 January, said six buysiders, including at least three holders, as well as two sellsiders.

 

The assumption is rooted in HNA management’s indication in late December that the Chinese policy bank is helping it source money offshore for the redemption, said two of the buysiders and one of the sellsiders. The belief is also bolstered by CDB having provided funding for the redemption of HNA offshore bonds due in November and December, said all eight market sources.

 

The Hong Kong carrier submitted a request to China’s central bank last month seeking last-minute help, said the second sellsider, citing management, and noting that HNA managed to obtain a bridge loan from Chinese banks to cover its own bond maturities the same way.

 

A CDB-led Chinese bank syndicate granted a total of CNY 7.5bn (USD 1.09bn) three-year credit lines to HNA Group at the end of November, said the first and a third buysider, citing the conglomerate. The sources weren’t aware of the facility was already prefunded to support an early November bond maturity.

 

As reported, HNA Group International, which is an offshore investment holding company, remitted funds on time to redeem USD 300m notes due on 6 November and USD 503m notes due on 3 December. Conceivably, there could be some of the credit line remaining available that could be used to cover the HonAir maturity, however it probably wouldn’t be sufficient by itself based on the size of the facility of the bonds that were repaid in November and December, said the third buysider.

 

While CDB’s failure to step in this time could diminish the effectiveness of the previous effort to bail out HNA, the bank has yet to decide whether it will step in this time, said the fourth buysider, a non-holder, citing CDB.

 

The policy bank has yet to determine whether its campaign to save HNA should extend to affiliates, including HonAir, said two advisory sources close to CDB.

 

A HonAir default would look bad on HNA considering that most of the Hong Kong carrier’s liquidity has been syphoned off to support its erstwhile largest -- and still key -- shareholder, HNA, said all the sources.

 

HonAir’s reported HKD 5.73bn available-for sale financial assets is actually effectively products issued by HNA, Ming Pao reported on 24 December. A source close to the matter confirmed that the financial assets, which were structured by China’s Bank of Communication International (BOCOM Int’l), represents HonAir exposure to HNA debt, said the fourth buysider.

 

As reported, HonAir first disclosed in its 1H17 financials that it held a USD 480m (HKD 3.76bn) “portfolio-linked structured note” from a third party, which management during a January 2018 investor call said was a BOCOM Int’l product. The 1H17 financials, which were audited by PwC, also shows that HonAir’s exposure during that period to fellow affiliates in the HNA Group web increased by 343% in 1H17, to HKD 2.8bn (USD 358m). The unaudited 1H18 financials don’t state anything about related-party exposure.

 

The unaudited 1H18 financials show HonAir having as of 30 June HKD 538m cash and equivalent, HKD 1.68bn restricted cash and time deposit, as well as the HKD 5.73bn financial assets at fair value, against HKD 5.98bn borrowings due in the subsequent 12 months.

 

HNA in July 2017 transferred a 34.16% stake in HonAir to “independent third party” Frontier Investment Partner LP, a Cayman Islands-registered limited partnership.

 

Frontier remains the carrier’s largest shareholder, with an effective 34.4% stake, followed by provincial controlled HNA-affiliate Hainan Airlines, with a 27.02% stake, and HKA Consultation, with 12.69%. HKA Consultation is wholly owned by Zhong Guosang, as per a JPMorgan credit research report dated 14 February 2018.

 

HNA-unit HNA Group (Hong Kong) Investment Co in late December sued HKA Consultation for the repayment of HKD 850m (USD 108.5m) promissory notes issued in December 2010, according to court documents.

 

HonAir, in a 2 January note to credit investors, clarified that some news reports were errant in stating the lawsuit was against the carrier itself. The note also stressed that HNA continues to support HonAir and that despite recent management changes and reports about supposed operational difficulties, the carrier was “operating as normal.”

 

The management changes last month were linked to HNA co-founder Chairman Chen Feng reasserting his control offshore following the death of fellow co-founder Wang Jian, who was the main architect of the group’s aggressive offshore expansion, said the fifth buysider and a seventh buysider, citing discussions with the carrier.

 

HonAir’s recently appointed management, during Guotai Junan-arranged meetings shortly before Christmas, cited potential HNA support as one of the solutions to the upcoming maturity, as reported. The previous management, which was replaced late last year, had been touting as recently as November a plan to refinance the due-January 2019s with a mix of panda bonds and public and private USD bonds, with any shortfall covered by unwinding the USD 730m structured product, as reported.

 

HonAir’s 6.9% notes were indicated at 79.5-mid before lunch time, said a buysider. The notes were down sharply from low 90s since late December, hit by a series of negative Hong Kong news coverage highlighting the management changes, the debt repayment risk, the HKA Consultation lawsuit as well as Blue Cross warning that it would not cover claims over unfulfilled HonAir tickets in case the carrier shuts down.

 

HonAir, HNA, CDB declined to comment.

 


by Zhou Ping and Daisy Wu