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HNA’s Hong Kong spat is a sign of worse to come

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HNA Group's Hong Kong quagmire could worsen its asset selloff. The Chinese conglomerate is at the centre of a gory boardroom brawl at struggling Hong Kong Airlines. The episode is unlikely to reassure anxious bondholders, or government creditors like China Development Bank.

[HONG KONG] HNA Group's Hong Kong quagmire could worsen its asset selloff. The Chinese conglomerate is at the centre of a gory boardroom brawl at struggling Hong Kong Airlines. The episode is unlikely to reassure anxious bondholders, or government creditors like China Development Bank.

The airlines-to-finance conglomerate cut its stake in the Hong Kong carrier in 2017, and now holds less than 30 per cent. Now major stakeholders allege that cash-strapped HNA siphoned money from it, a charge HNA has denied. The dispute has set off a bizarre leadership squabble, leading to confusion about who is actually in charge.

Hong Kong Airlines shareholders were told last month that having lost about HK$3 billion (S$521 million) in 2018, the company would need to raise HK$2 billion to retain its operating license, Reuters reported. Suspicious stakeholders demanded to review the accounts, including dealings with HNA-backed entities.

Zhong Guosong, a former director and current shareholder, argued that they shouldn't stump up capital if it risked being sucked out of the company. One group of shareholders said last month Mr Zhong had been appointed chairman at an extraordinary meeting, a claim Hou Wei – still described as chairman on the company's website - rejects. The factions, then locked in an argument over share ownership, have gone to court. On May 8 the South China Morning Post reported the airline's auditor quit.

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Investors were already stressed. CWT International, an HNA-backed investment holding company, said last month that it had failed to repay debt, prompting lenders to grab assets in China and the United States. Now the Hong Kong carrier's perpetual bonds have fallen to around 80 US cents on the dollar, according to Refinitiv data.

The risk is that this particularly ugly public episode worries would-be buyers of the firm's other stakes, which range from technology companies to properties. That might make it harder for HNA to get good prices for assets to pay down debt. The company's biggest creditor, the state-owned policy lender China Development Bank, was reported last year to have despatched a working group to the conglomerate's headquarters in Hainan to oversee asset sales. They may be calling some of the shots, which means Beijing could ultimately end up paying HNA's bills. That might not be much comfort to Hong Kong Airlines, however.

CONTEXT NEWS

Shareholders in Hong Kong Airlines were told on April 1 that the carrier had lost HK$3 billion in 2018 and would need at least HK$2 billion in new funding or it would risk losing its operating licence, Reuters reported exclusively on April 12.

Former director and current shareholder Zhong Guosong, together with Frontier Investment Partner, said via a spokesman that they had launched an investigation into "the embezzlement of HKA assets and serious financial misappropriation by HNA Group parties", Reuters reported.

The two parties claim to control a combined 61 per cent of shares in the airline, and say Mr Zhong was made chairman after an extraordinary shareholder meeting, a claim others dispute. There is a legal case involving allegations that Frontier Investment Partner had transferred its stake to another party.

REUTERS