China Prepares To Nationalize Systematically-Important HNA Group

The last time we looked closely at China’s “big four” conglomerates, HNA, Anbang, Evergrande and Dalian Wanda, was back in lat 2017 in the context of the systemic risk (i.e. record debt) that these companies had accumulated as part of their tremendous offshore M&A spree in prior years which however came to a crashing halt once the companies were no longer able to issue cheap debt and pursue a ponzi strategy of buying up more companies, then using them as even more collateral for even more debt for even more M&A and so on.

And while the systemic risk among these conglomerates declined in recent years, it still remained as a byproduct of the sheer size – measured by the number of people they employ as well as debt on the balance sheet – and may explain why according to Bloomberg, China is planning to take over, i.e., nationalize one of the most infamous of Chinese conglomerates, HNA Group, and sell off its airline assets “after the coronavirus outbreak hit the indebted conglomerate’s ability to meet financial obligations.”

In other words, while zombie conglomerates such as HNA, Anbang, et al were on the cusp of collapse for the past three years, all it would take to tip them over into insolvency was a “black swan”, or rather “black bat” event. Such as the coronavirus epidemic. Which left Beijing with little choice: nationalize the company, or let it fail and suffer the consequences as thousands of people are suddenly left without a job.

As Bloomberg further reports, the government of Hainan, the southern island province where HNA is based, “is in talks to take control of the conglomerate, which has been shedding assets after a global buying spree left it with one of the highest levels of corporate debt in China.” Bloomberg sources said that in keeping with a model laid out for bail outs of insolvent banks, the HNA airline assets could be taken over later by other local companies.

The report also said that the takeover announcement could be made as early as tomorrow, though talks are ongoing and could be delayed or fall apart, the people said.

The virus epidemic has killed more than 2,000 people, the majority of them in China, where it has crippled the world’s second-largest economy, shuttering stores, bringing factories to a halt and triggering a virtual shutdown of the airline industry. Since 2018, HNA has sold off tens of billions of dollars in assets including stakes in Hilton Worldwide Holdings Inc. and Deutsche Bank AG.

And speaking of Deutsche Bank, with a nearly 5% stake in the German lender, it remains unclear if HNA would be forced to liquidate this holding under after takeover, although judging by the kneejerk reaction lower, traders aren’t willing to hang around and find out.