China’s HNA raises billions from shadow banks that worry Beijing

Bloomberg

Few companies have come to symbolise China’s global ambitions quite like HNA Group Co.
In just three years, the private conglomerate has invested at least $45 billion around the world. How did HNA pay for it all?
That question is gaining new urgency as Beijing moves to curb debt-fueled overseas investments that could ultimately pose risks to the nation’s companies and economy. One part of the answer lies inside the country’s vast shadow banking industry, whose heady growth has begun to worry Chinese authorities.
A Bloomberg News review of more than 100 investment documents and corporate filings sheds light on how HNA has financed its remarkable run of deal-making, which has included acquiring multi-billion dollar stakes in Deutsche Bank AG and Hilton Worldwide Holdings Inc.
The documents, pieced together from fund prospectuses and disclosures to China’s Administration for Industry and Commerce, show how HNA has employed a network of trusts and asset management products, in addition to more conventional financing, to fund everything from takeovers to day-to-day expenses. Among the key findings: Units of the group have pledged more than $10 billion of unlisted shares to non-bank lenders and, in some cases, have paid interest rates on shadow debt that far exceed China’s benchmark rates for bank loans and bond issuance.
While there’s no indication that HNA has done anything illegal, the financing is unusual for a company of its size. It suggests that HNA may be turning to more expensive sources of funding as some traditional lenders restrict credit to the group, according to Andrew Collier, the Hong Kong-based founder of Orient Capital Research. For Collier, it also raises doubts about whether HNA’s investments will prove lucrative enough to cover its borrowing costs. The group’s return on equity fell to 1.7 percent last year from 3.6 percent in 2015, while its effective interest rate climbed to 4.4 percent from 4 percent, data compiled by Orient Capital show.
“It’s questionable whether they’ll be profitable enough to repay the loans,” said Collier, who wrote a 13-page report on HNA’s shadow banking activity. HNA could eventually face a funding crunch as its dependence on higher-cost financing increases, he said.
To be clear, there’s no sign that HNA is struggling to meet its obligations. And while bonds issued by some of its units have slumped this year, the securities are still trading far from distressed levels. The 2018 dollar notes of HNA Group International Co., an offshore unit of the conglomerate, yielded 8.47 percent on Friday.
HNA’s parent company said in a response to questions that financing from non-bank institutions makes up a “small” portion of the group’s overall funding and that its credit limit from Chinese banks has increased by more than $15 billion this year. The company said its debt-to-asset ratio has dropped for the past seven years and added that HNA Group’s profitability and asset quality have been improving.
“We are confident in our ability to create value for our shareholders,” the company said.
HNA may have several reasons to choose higher-cost shadow loans over more conventional financing, even after China’s government escalated its clampdown on the shadow banking industry this year. For one, the fundraising process tends to be quick, said David Yin, an analyst at Moody’s Investors Service who specialises in shadow banking.