HNA Group’s Debt Overhang Expanded in 2017

China’s aviation-to-finance conglomerate HNA Group reported a 22% increase in debt and a widening of the debt-to-assets ratio last year even as the company began selling assets to resolve a cash crunch brought on by years of heavy spending on offshore acquisitions.

A stock exchange filing (Link in Chinese) on HNA’s 2017 financials released late Friday shed light on the conglomerate’s persistent debt pressure. By the end of 2017, HNA had total assets of 1.23 trillion yuan ($194 billion), up 21.3% from the previous year. But debt grew even faster, by 22% to 737 billion yuan at the end of last year, the financial report showed. The debt-to-assets ratio climbed to almost 60% at year-end.

Once among China’s most aggressive dealmakers, HNA has been in a liquidity squeeze since last year amid regulators’ clampdown on Chinese companies’ debt-driven investments. HNA has started to offload assets to reduce debt, selling more than $13 billion of assets in the past four months, according to Bloomberg. The Friday report didn’t include figures reflecting the recent sales.

HNA is among several Chinese private conglomerates that fell under closer regulatory scrutiny last year as authorities tightened oversight of corporate debt and highly leveraged investments. Property giant Dalian Wanda Group Co. and insurer Anbang Insurance Group Co. have also pared back assets after years of overseas shopping for properties from hotels to financial companies.

According to the 2017 report, HNA held 176.3 billion yuan in cash at the end of the year. Meanwhile, short-term debts totaled 126 billion yuan, including 55.8 billion yuan due in one year.

In 2017, HNA posted revenue of 587.1 billion yuan, up 221% from the previous year. Most of the revenue growth was came from newly acquired assets. For example, HNA’s revenue from electronics surged 786% in 2017 to 315.2 billion yuan, reflecting the $6 billion takeover of high-tech parts distributor Ingram Micro at the end of 2016.

HNA’s net profit rose 80% to 2.6 billion yuan, the report showed. However, if non-recurring items such as investment returns were excluded, the company would have posted a net loss of 13.4 billion yuan, according to the filing.

In November, HNA Chief Executive Officer Tan Xiangdong told media that the company also held about 1 trillion yuan of off-balance sheet assets. The company didn’t provide data on such assets and related debt.

HNA’s borrowing costs surged to 32.1 billion yuan in 2017 from 20.2 billion yuan a year earlier, reflecting the company’s financial distress, according to Bloomberg.

Concerns over HNA’s deepening cash woes mounted in recent months on reports of missed payments to aviation fuel suppliers and other industry creditors.

HNA has stepped up asset sales since late last year to reduce debt. Hainan Airlines Co., HNA’s flagship carrier, on Friday announced the sale of part of its stake in Brazilian airline Azul S.A. to a subsidiary of United Continental Holdings for $138 million. Earlier this month, another HNA unit sold the 295 million shares it held in Hong Kong-listed Guangzhou Rural Commercial Bank for HK$1.5 billion, documents from the Hong Kong stock exchange showed.

HNA also said in early April that it plans to sell down its 25% stake in Hilton Worldwide Holdings Inc., one of its highest-profile deals costing $6.5 billion in 2016. HNA also offloaded several land plots in Hong Kong and announced plans to sell its Avolon Aerospace Leasing Ltd. unit for $884 million.

Contact reporter Han Wei (weihan@caixin.com)