Sep 30, 2021 09:16 PM

In Depth: Who Gets What in HNA’s Complex Bankruptcy Restructuring

HNA’s headquarters in Haikou, South China’s Hainan province, in October 2019. Photo: VCG
HNA’s headquarters in Haikou, South China’s Hainan province, in October 2019. Photo: VCG

HNA Group Co. Ltd. has finally secured strategic investors for its core airline and airport businesses, and has proposed a restructuring plan for the 321 subsidiaries under its umbrella to their more than 60,000 creditors, moving a key step forward in its nearly eight-month bankruptcy restructuring.

Liaoning Fangda Group Industrial Co. Ltd., a little-known steelmaker, emerged as a dark horse to rescue the conglomerate’s flagship airline unit by injecting 41 billion yuan ($6.3 billion) to help it repay its debts. A Hainan government-owned company will take over a chunk of its airport assets.

Following years of highly leveraged global expansion, HNA was struggling to pay its more than 1 trillion yuan in debt after the government tightened financing rules and oversight for overseas asset purchases in 2017. After the coronavirus pandemic devastated HNA’s airline business, the government of its home province of Hainan took control in February 2020, and the company entered bankruptcy restructuring in January.

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The core of HNA’s restructuring is its flagship airline unit, which has the highest sensitivity, the greatest risk and has gained the most attention, according to a person close to the working group created by Hainan’s provincial government to handle HNA’s restructuring.

HNA’s airline assets include Shanghai-listed Hainan Airlines Holding Co. Ltd. (600221.SH) and nonlisted companies such as Tianjin Airlines and Capital Airlines, among others. At the end of 2020, HNA was operating 668 commercial airplanes on 1,500 routes, employing 64,000 people, or about two-thirds of HNA’s total 100,000 employees. From the perspective of maintaining social stability and business growth, the priority for HNA is to revive its core airline business, the person close to the working group said.

Dark horse as white knight

HNA initially hoped that state capital could take over its airline segment for a transitional period, but the working group opted for a market-oriented restructuring, which required maintaining the airline as a private company.

Shanghai-based carrier Juneyao Airlines Co. Ltd. (603885.SH), Chinese conglomerate Fosun International Ltd. and steelmaker Liaoning Fangda Group Industrial Co. Ltd. were the three private investors that submitted bids for HNA’s airline assets.

Juneyao initially seemed the most plausible choice. If combined with Hainan Airlines, Juneyao could achieve complementary advantages in routes and flights, putting it on par with China’s three biggest airlines — China Southern Airlines Co. Ltd., China Eastern Airlines Corp. Ltd. and Air China Ltd. — in terms of assets, a person close to the negotiations said.

In the bidding, Juneyao also teamed up with online travel agency Group Ltd., property developer Country Garden Holdings Co. Ltd., a regional carrier, and an e-commerce giant as strategic partners, the person close to the negotiations said. Juneyao’s restructuring plan proposed building aviation hubs in Shanghai, Haikou and Chengdu and systematically laying out an air cargo network.

But there were drawbacks to Juneyao taking over. Although it has industry experience and offered synergies, it has also had a lot of friction with the management teams of other airlines it has taken over, analysts said. HNA doesn’t want strategic investors to participate in management and wants to maintain the independence of its airline brand, people close to Juneyao said. Hainan Airlines has a strong management team, and what it lacks is money, not experience, people close to the carrier said.

The other bidder, Fosun, also has its own airline partner, Xiamen Airlines Co. Ltd., according to people close to the negotiations. Fosun’s final offer was less than 30 billion yuan, but it asked for a 30% stake, compared with Fangda’s request for a 25% stake.

Among the three, Fangda entered the bidding last and was the only airline industry outsider. Its eventual victory wasn’t what the market expected, but it was a reasonable choice, the person close to the working group told Caixin.

After three rounds of bidding, Fangda outbid its two rivals with a 41 billion yuan total investment, including 38 billion yuan for restructuring HNA’s airline business, and 3 billion yuan to repay the wealth management debt from HNA-backed peer-to-peer (P2P) lending platforms. The price was sweeter than Juneyao’s 35 billion yuan in the last round.

Fangda joined the bidding because Fosun approached it for financing, people close to the negotiations said. With 50 billion yuan of cash on hand and intentions to transition from its core business, the steelmaker preferred taking a direct stake rather than providing financing to Fosun, the people said.

Fangda was chosen for several reasons, the person close to HNA’s working group said. HNA’s asking price for the airline business was 35 billion to 40 billion yuan, because it has about 30 billion yuan of operating debt that has to be repaid, and it needs to retain 8 billion to 10 billion yuan of cash to maintain normal operations, the person said. At the same time, Fangda also proposed a higher debt retention level of about 14 billion yuan after the restructuring, which means a smaller loss for creditors.

The key in WMPs

In addition, Fangda agreed to donate 3 billion yuan to resolve the wealth management product debts from HNA’s P2P platforms. More than 60,000 investors bought these WMPs from HNA’s P2P platforms, among them about 23,000 HNA employees. How to resolve these debts in a fair way has been a major obstacle to HNA’s restructuring. Neither Fosun nor Juneyao proposed a solution for handling these debts, the person close to the working group said.

According to the restructuring plan announced Wednesday, HNA’s WMPs creditors eventually can get cash, stock, and beneficial rights to trust shares. In addition to the 3 billion yuan from Fangda, Hainan Development Holdings Co. Ltd., the state-owned company taking over HNA’s airport unit, will also donate an undisclosed amount of cash and stock, people close to HNA told Caixin.

WMP investors can each receive 30,000 yuan in cash. Additionally, HNA’s more than 7,000 flight crew members can each get up to 190,000 yuan in cash, over 7,000 other employees can each get 140,000 yuan in cash, and former crew members and retirees can receive 90,000 yuan. About 35,000 outside investors will each receive 70,000 yuan. The rest of their principal and interest will be repaid in stock and trust plans.

The plan, subject to court approval, is controversial, because it will give many individual investors a higher repayment rate than other creditors, and HNA’s current employees are given preference. HNA explained that employees should get preferential treatment because the relief funds mainly come from strategic investors and these investors will only provide the money if the entire plan is approved.

Of the 41 billion yuan Fangda offered, about 16 billion will come from financing and the rest will be the company’s own cash. About 40% leverage is not high for acquisition deals, industry participants said.

In comparison, under Juneyao’s partnership structure, Juneyao only planned to invest 5 billion yuan, and its strategic partners committed as much as 24.95 billion yuan. If Juneyao would have won the bid, HNA worried that other partners might back out, the person close to the negotiations said.

Fang’s murky background

Fangda’s founder Fang Wei has been linked to a 2014 investigation into Su Rong, a former vice chairman of the country’s top political advisory body who was sacked after allegations surfaced that he accepted bribes. The probe into Su was linked to his time in Jiangxi and related to alleged corrupt land deals and construction projects, according to local media reports. One of Fangda’s acquisitions in Jiangxi was related to Su’s case.

Fang has been candid about the investigation and HNA’s working group has done due diligence on him and found no wrongdoing, people close to the deal said.

Over the years, Fangda has become known for acquiring companies on the verge of bankruptcy. In 2002, Fangda rescued troubled state-owned Fushun Carbon Co. Ltd. and made it profitable the same year. Now it owns four Chinese mainland-listed companies — Fangda Carbon New Material Co. Ltd. (600516.SH), Zhongxing Shenyang Commercial Building Group. Co. Ltd. (000715.SZ), Northeast Pharmaceutical Group Co. Ltd. (000597.SZ), and Fangda Special Steel Technology Co. Ltd. (600507.SH).

In the first half of 2021, Fangda posted revenue of 62.39 billion yuan and profit of 5.75 billion yuan. By the end of June, the group had total assets of 150.56 billion yuan, total liabilities of 84.45 billion yuan, and monetary funds of 50.8 billion yuan. Abundant cash on hand is also a key reason why HNA picked it.

After the restructuring, Fangda would directly hold about 13% of Hainan Airlines Holding. Additionally, it will also take over partial stakes in Hainan Airlines’ former biggest shareholder Grand China Air Co. Ltd. and other nonlisted airlines owned by Hainan Airlines, raising its total holdings to about 25%, while Grand China Air’s holdings in Hainan Airlines would be diluted to 11.54%.

Notably, how HNA’s unlisted airline assets will be dealt with has not been disclosed. These assets include Tianjin Airlines, Beijing Capital Airlines, West Airlines, Air Guilin, Suparna Airlines, Hong Kong Airlines and Africa World Airlines.

In 2021, HNA pledged that it would inject its unlisted airline assets into Hainan Airlines Holding within three years, but that plan had been delayed repeatedly. After the Fangda deal was announced, Hainan Airlines Holding said in a statement that as it cannot transfer its stakes in Beijing Capital Airlines and West Airlines during the restructuring, the injection plan will be delayed by another two years.

Government takes over airports

The airport segment is also one of HNA’s traditional core businesses. In addition to its main unit, HNA Infrastructure Investment Group Co. Ltd. (600515.SH), HNA also owns stakes in 11 regional airports, including Sanya Phoenix Airport, Haikou Meilan International Airport, and Frankfurt–Hahn Airport in Germany. The airport unit also has real estate investments and a duty-free shop business.

Under the restructuring plan, Hainan Development Holdings Co. Ltd will end up owning about 29% of HNA Infrastructure, becoming the largest shareholder. State-owned Hainan Development is a major infrastructure investment and operating entity in HNA’s home province of Hainan. As of June, Hainan Development had 99.6 billion yuan in total assets and 46.1 billion yuan in net assets, according to its website.

After the restructuring, HNA Infrastructure will gradually exit from its real estate business and focus on airports and duty-free shops, Gu Gang, HNA’s party secretary and head of the working group, said on Sept. 17. The company will step up development related to Riyue Plaza, the largest shopping mall in Haikou, Hainan’s provincial capital.

HNA will restructure and divide into four completely independent businesses — airlines, airports, finance, and retail and other industries, each of which will be led by new shareholders and completely independent from each other to ensure that each returns to its core business, Gu said at an routine internal meeting on Sept. 18.

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HNA is still seeking strategic investors for its retail businesses, including Shenzhen-listed CCOOP Group Co. Ltd. (000564.SZ) and stakes in Hong Kong-listed China Shun Ke Long Holdings Ltd. Investors for its retail businesses will be announced soon, a source close to the matter told Caixin.

As of Feb. 10, HNA’s 321 subsidiaries had total assets of 253.2 billion yuan and total liabilities of 1.04 trillion yuan, according to the draft restructuring plan. As of Sept. 13, the 321 companies have a total of 64,368 creditors, who have claimed more than 1.46 trillion yuan in debts. The working group has confirmed about 746.7 billion yuan of the claims.

Under the restructuring plan released Tuesday, Hainan Airlines is obligated to pay 161.3 billion yuan, or about 40% of the roughly 400 billion yuan claimed by 4,915 creditors.

Creditors would each receive no more than 30,000 yuan in cash as a repayment, and they will become beneficiaries of a trust set up by HNA holding the total interest of the 321 companies. Under the restructuring plan, the creditors will share the operating income of those companies after restructuring is complete.

Because the estimated disposal of the trust plan will take a long time, and because the core airline and airport assets are not included, the actual repayment rate will be relatively low, some creditors told Caixin.

The market-oriented bankruptcy reorganization is the burden that HNA shareholders must bear, and is also the inevitable consequence of the wild growth of private enterprise, Gu said.

“We should fully realize that a successful restructuring preserving HNA’s brand, keeping the jobs of 100,000 employees, and facilitating the rebirth of HNA, are the biggest change and opportunity given by the Communist Party and the country, as well as the society,” Gu said.

Contact reporter Denise Jia (

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