Who’s interested in HNA?

Distressed debt managers are shunning single-borrower credit investments as they face challenges in the due diligence process.

HNA Group, a Hainan-based Chinese conglomerate, is selling another one of its assets. A subsidiary of HNA Investment Group, a property development and distribution company, is being sold to Fusheng Group, a Fuzhou-based property developer, for $456 million, according to a regulatory filing Wednesday.

Although the group has been unloading billions of dollars of assets, distressed debt managers in the region are not seen as prioritising these transactions.

Andy Brown, a partner of ShoreVest Partners, a Guangzhou-headquartered distressed debt and structured credit specialist in China, said his firm has been seeing bigger market opportunities on the non-performing loan side than investing in a single credit.

“If you are a single credit investor, and if it does not work out as you expected for any reason, it can dramatically affect your returns,” he told PDI last Friday.

According to Brown, ShoreVest has done single-credit deals in the past, where significant deep due diligence on the core part of portfolios is required, but his firm prefers to diversify investment portfolios to mitigate concentration risk.

Rather than distressed specialists, it is real estate investment managers showing interest in potential dealflow from the conglomerate as most of the group’s assets are property.

However, the fundamental challenges are in the due diligence process. Ellen Ng, a Hong Kong-based managing director of Warburg Pincus, a New York-headquartered investment firm said, “I think the challenge is nobody knows who makes the decisions.”

She told the conference attendees at Bloomberg Invest Asia that “it is not about having the interests, but about who, when and which office buildings are going to be in the market.”

Concerns about HNA Group’s free cash flow is also bringing asset-backed loan type transactions to the market.

Pacific Alliance Group, a Hong Kong-based private equity firm, made an asset-backed loan for an undisclosed sum to the group which pledged HK$3.1 billion ($396 million) worth of shares to another HNA subsidiary, Hong Kong International Construction Investment Management Group, as PDI reported.

On February 14, the firm circulated a statement that HNA’s senior management purchased offshore USD-denominated bonds guaranteed by the group.

The company is in a ‘very healthy’ financial position, the announcement said, adding that its total assets reached 1.5 trillion yuan ($235.5 billion; €250 billion) with a liability-to-asset ratio of 59.9 percent as of December 31, 2017.

It also said on February 9 that the group obtained a 20 billion yuan credit line from China CITIC Bank which signed a strategic cooperation agreement with HNA Group.

HNA Group’s liquidity has been deteriorating, according to Standard & Poor’s Global Ratings which conducted a credit assessment of the group. The rating agency lowered the group’s credit profile to CCC+ on November 29, 2017. Its group credit profile was B+ in January 2017, as per S&P’s report.