HNA Misses Fuel Bill Payments Amid Liquidity Concerns

China’s HNA Group skipped payments on a substantial amount of bills to aviation fuel suppliers and other industry charges, sparking concerns of the civil aviation regulator, an official at the Civil Aviation Administration (CAAC) told Caixin on Wednesday.

The unpaid bills underscored the deepening cash crunch at the aviation-to-financial service conglomerate, which has strived to offload huge debts by paring back assets globally.

The CAAC official told Caixin that the administration has held meetings with HNA executives and urged the company to meet its payment obligations as soon as possible.

“HNA has missed quite a lot of payments and has affected interests of other companies in the industry chain,” said the official, adding the CAAC hasn’t taken any mandatory measures against HNA due to concerns over “public impacts.”

HNA controls more than 10 airlines including Shanghai-listed Hainan Airlines, Tianjin Airlines and Lucky Air.

Last mouths, news media reported that HNA’s airlines operations have amassed an estimated 3 billion yuan ($476 million) in unpaid bills to state-owned aviation fuel supplier China National Aviation Fuel Group Ltd. (CNAF).

In response to Caixin’s question, HNA said at that time the group has maintained sound cooperation and communication with CNAF and all the payments were under normal condition.

An employee of a Shenzhen-based aviation fuel company told Caixin that HNA has also missed payments to his company. The company hasn’t stop fuel supplies to HNA carriers, but has sent people to HNA’s headquarters in Haikou to pursue the payments, said the employee.

Another source from an aircraft leasing firm said HNA has repeatedly delayed its lease payments.

Concerns about HNA’s liquidity have mounted since last year when the company, along with several other major dealmakers such as Wanda Group and Fosun International, were criticized by regulators’ for highly-leveraged investment sprees.

HNA has speeded up sales of its assets to reduce debt piles over the past months. Its latest attempt of asset disposal was announced on Tuesday with a plan to sell its 25% stake in Hilton Grand Vacations Inc., a timeshare spinoff of Hilton Worldwide Holdings Inc. HNA bought the stake in Hilton Worldwide in 2016.

Caixin learned from sources close to the matter that HNA is also seeking to sell some of its domestic assets, including properties in Shanghai, Haikou, Beijing and Suzhou.

The dealmaker

Despite its cash woes, HNA last week proposed a purchase of an undisclosed stake in leading e-commerce platform Dangdang Inc. through its Shanghai-listed arm Tianjin Tianhai Investment Co. Ltd.

Although no details of the deal have yet been confirmed, it has sparked closer scrutiny of HNA’s capital condition and its fundraising tactics in previous deals.

Tianhai Investment said in the filing that it may issue new shares and raise funds for the purchase of Dangdang. Reuters reported last October that HNA was seeking to buy a 90% stake in Dangdang and may value the company at between $1.2 billion and $1.5 billion.

Tianhai Investment remained little-known until 2016 when it spent $6 billion to take over the world’s largest information technology products distributor Ingram Micro. Ingram Micro’s 2015 revenue was about four times of Tianhai Investment.

Previously named as Tianjin Marine Shipping Co., Tianhai Investment was a loss-making shipping firm acquired by HNA’s logistics arm, Grand China Logistics Group, in 2007 and renamed in July 2015.

In 2013, HNA revealed a plan to raise 12 billion yuan for Tianjin Marine by issuing shares to select investors. The company said in a regulatory filing that the capital would be mainly used for the purchase of 14 crude oil and gas tankers. The fundraising was approved and completed in 2014. Investors include HNA’s another logistics arms HNA Logistics, Guohua Life Insurance Co., and several major commercial banks such as Pudong Development Bank and the Industrial and Commercial Bank of China.

The massive fundraising raised market eyebrows. “It is strange that the regulator can approve such a huge fundraising by a small company like Tianjin Marine,” said a source close to the HNA. In 2013, Tianjin Marine’s net assets stood at 32 million yuan with an annual net loss of 130 million yuan, according to a company report.

But financial reports in 2014 and 2015 indicated that the funds raised in the 2014 placement were not spent on ships. Instead, the money was later invested in four acquisition deals including the purchase of Ingram Micro, sources close to the company said.

The takeover of Ingram Micro boosted Tianhai Investment’s total revenue to 146 billion yuan in the first half 2017, 106 times higher than the previous year. The company’s share price surged over 60% in four months after the deal was announced.

The company’s 2016 financial report showed that most of the investors of the 2014 placement had sold their shares by the end of the year. Sources said HNA had pursued the Ingram Micro deal in hope to provide better returns or a proper exit for investor.

After the 2014 share placement, HNA’s newly established arm HNA Logistics held 23.8% in Tianjin Marine, while the former controller Grand China Logistics’ stake was reduced to 6.15%.

A person close to the matter told Caixin that the 2014 share placement is part of HNA’s plan to transfer the control of Tianjin Marine to HNA Logistics from then debt-ridden Grand China Logistics, to prevent the listed unit from being infected by the parent’s debt crisis.

The debt crisis

Several sources close to HNA told Caixin that the group had a very difficult time during 2011 and 2012 due to the debt crisis of Grand China Logistics amid the global shipping market downturn.

HNA invested heavily in 2009 in shipping and logistics business, counting on a market rebound supported by China’s 4 trillion yuan economic stimulus plan. But the rebound didn’t last long.

In 2009, Grand China Logistics acquired 50% stake in Zhejiang’s largest private shipbuilder Jinhai Heavy Industry Co. Part of the investment was orders to build 30 ships. Later that year, Grand China Logistics purchased another 20% stake in Jinhai for 1.6 billion yuan.

In 2011, HNA raised 4.5 billion yuan for Jinhai from eight strategic investors. Jinhai was valued at 11.8 billion yuan at that time, five time higher than its valuation two years ago.

But Jinhai was hit badly by the sharp market decline since 2012, which forced many ship buyers to scrap their orders. A Jinhai employee said the company had to shut down 80% of its facilities during the market downturn.

A major revenue source of Jinhai was its parent Grand China Logistics, which had placed ship orders worth over 20 billion yuan. But Grand China Logistics was also under capital crunch after years of heavy investments. In 2012, Grand China Logistics had 59 billion yuan in total assets with 43.7 billion yuan debts, company data showed.

According to shipping industry portal CNSS, in mid-2012, Grand China Logistics scrapped 20 orders it previously placed with Jinhai. A Zhejiang newspaper reported that between late 2011 and the end of 2012, local courts received over 200 cases against Jinhai, involving over 400 million yuan in debts.

A source close to the matter told Caixin that the ship purchase plan announced by Tianjin Martine in its 2013 share placement was set to take over abandoned ships from Jinhai. It will boost Tianjin Marine’s capacity with low costs while reducing Jinhai’s pressure, said the source. But the plan didn’t go through.