Mergers & Acquisitions

China’s leveraged asset buyers must now brace for discounts in their forced fire sales

PUBLISHED : Saturday, 01 September, 2018, 8:03am
UPDATED : Tuesday, 02 October, 2018, 7:24pm

China Energy Finance Corporation (CEFC), the biggest Chinese investor in the Czech Republic, will be bailed out from its debt-fuelled shopping spree in Europe with a haircut, the first of a trio of mainland asset buyers that are being forced into holding fire sales for their acquisitions.

CEFC is negotiating to sell its Czech portfolio of luxury hotels, a football club, a brewery and a broadcaster to Chinese state conglomerate Citic Group for a combined 6.7 billion yuan (US$980 million), a 44 per cent discount to the 1.5 billion (US$1.75 billion) valuation on CEFC Europe’s books as of May, according to two people familiar with the offer.

CEFC, established in 2002 by Chinese oligarch Ye Jianming, “had spent wildly,” buying assets “without any obvious strategic rationale,” said Kaiyuan Capital’s managing director Brock Silvers, in Shanghai. “That is why Beijing had to forcefully intervene, not purely for economic reasons, but for political ones as well.”

Further Reading: China’s probes on Fosun, HNA and others unleash the power of the unspoken word

Shanghai-based CEFC is not alone. Anbang Group and HNA Group, two of China’s most aggressive asset buyers of the past three years, are also being put through the wringer by regulators over concerns about the mountain of debt that has been used to fund their shopping. The dismembering of China’s largest private conglomerates form part of Chinese President Xi Jinping’s effort to contain risks to the country’s financial system wrought by their debts.

The journey of China’s crackdown on debt – known as deleveraging in economic circles – can be traced back to a frigid winter afternoon in December 2016, when China Securities Regulatory Commission (CSRC) chairman Liu Shiyu eviscerated leveraged asset buyers as “demons that sucked the lifeblood” out of the investing public, during his speech at a forum in Beijing.

It was a language that was unusual in Chinese officialdom, when Liu called the asset buyers “barbarians,” “bandits,” “evil monsters” and “poisonous demons,” according to a leaked video.

China’s then insurance regulator Xiang Junbo would soon chime in on Liu’s broadside, lashing out at insurers under his agency’s watch for using wealth products with guaranteed returns to fund their war chests. The regulator would soon crack down on such schemes, suspending the licences of dozens of such insurers.

Still, Xiang himself was not spared from the crackdown. He was charged with accepting US$3 million in bribes, after being fired in April 2017.

Caught up in the dragnet was Anbang, an automotive insurer that ballooned into one of China’s biggest wealth managers and asset owners. With its chairman Wu Xiaohui in jail serving an 18-year sentence for fraud and embezzlement, Anbang has been placed under state ward, and is looking sell about US$10 billion of overseas property to shore up its finances, according to people familiar with the plan.

Explainer: How China’s insurance industry evolved over the years

The insurer’s overseas portfolio includes companies in Belgium, the Netherlands and South Korea. The Beijing-based company also bought properties all over the world, including Strategic Hotels & Resorts for US$6.5 billion in 2016, the Four Seasons Washington, and the JW Marriott Essex House Hotel in New York.

It even entered into an unsuccessful price war in 2016 with Marriott International for control of Starwood Hotels and Resorts Worldwide. Marriott would eventually buy Starwood for US$13.6 billion. Two years earlier, Anbang paid US$1.95 billion for the Waldorf Astoria hotel in New York, setting the record for the highest price ever paid for a single US hotel. The hotel, which is being converted into a service apartment, is not part of the fire sale, according to a report by Reuters.

The third conglomerate that is being forced into a fire sale is the HNA Group, China’s fourth-largest airline based in Hainan province. HNA, which rang up 1 trillion yuan of debt - funded mostly by China Development Bank, according to Bloomberg - in its expansion, had already disposed of US$17 billion of assets this year, in a U-turn from its buying spree.

It sold three plots of prime land at Hong Kong’s former Kai Tak airport site, pared its stake in Deutsche Bank, and disposed of its holdings in Hilton Worldwide Holdings, NH Hotel Group and an office tower in Minneapolis.

In another sign of tightened cash flow, HNA is using a HK$550 million (US$70 million) luxury residence on the exclusive Victoria Peak of Hong Kong as collateral for a loan. It is also looking for a buyer to take the last of four plots of Kai Tak land - bought for a total of HK$27.2 billion - off its books, according to agents familiar with the sale. HNA had already sold three of the four plots for HK$22.2 billion, agents said.

Spared from the scrutiny, for now at least, are Dalian Wanda Group and Fosun Group, which have taken steps earlier to rein in their borrowings and acquisitions.

Wanda, owned by China’s wealthiest man of 2013 to 2016, held its fire sale in July last year, when tycoon Wang Jianlin disposed of 76 hotels and 13 theme parks for a combined 63 billion yuan, in the country’s biggest real estate deal to date.

Fosun, the Shanghai-based health care and financial conglomerate that also owns Club Med and Cirque du Soleil, ratcheted up its asset sales in December 2016 to bolster investor confidence in its credit profile. The company sold its casualty insurance unit Ironshore to Liberty Mutual Group for nearly US$3 billion, and disposed of a 50 per cent stake in Shanghai retail and office complex for 5.33 billion yuan.

“The recent asset disposal [would] let people know that Fosun excels in both buying and selling,” Fosun founder Guo Guangchang said in a December 8, 2016 letter to employees.

In the midst of all these asset disposals stands CEFC, whose founder Ye was appointed economic adviser to the Czech president, Milos Zeman.

“CEFC is a unique case,” said Silvers. “While HNA and others are selling everything they bought to strengthen their balance sheet and tough out the debt crisis,” CEFC’s extravagance was global, widespread and did not seem to make much strategic rationale, he said.

Propped up by its acquisitions, CEFC was getting itself involved in China’s foreign relations, blurring Ye’s identity as both businessman and diplomat, breaking a taboo that touched a raw nerve among Chinese policymakers, according to people familiar with the matter.

“Many Eastern European economies are smaller and less developed than their Western European counterparts. This may leave them more open to Chinese economic, political and ideological influence,” said Silvers. “Given Beijing’s aspirations for the region, it could have been a significant foreign affairs setback had CEFC’s situation not been amicably resolved.”

Besides the Czech Republic, CEFC’s global footprint had extended to a 4 per cent stake in Abu Dhabi National Oil, and 35 per cent in oil exploration rights in Chad.

It even offered US$9.1 billion in September 2017 for 14.2 per cent of Russia’s state-backed company Rosneft, becoming one of the largest shareholders in the world’s biggest oil producer. The stake would eventually be taken over in May this year by the Qatar Investment Authority.

CEFC is now also linked to a bribery case underway in New York courts, where Hong Kong’s former home affairs secretary, Patrick Ho Chi-ping, faces trial for routing US$2.9 million of bribes for Chadian and Ugandan officials through US financial institutions. Ho was employed by CEFC’s cultural foundation. CEFC declined to comment about Ho’s charges, while the New York Court of Appeals on August 10 denied Ho’s latest application to be released on bail.

Ye himself would disappear from public view about the time that Lunar New Year celebrations began in February 2017, under investigation by Chinese authorities, according to several sources, including a special envoy dispatched to China by Zeman.

While the businessman, believed to have turned 41 in June, has not yet been charged with a crime, his conglomerate is under management by a state company, and its fire sale is underway.

A creditors’ committee led by the China Development Bank (CDB), China’s biggest state-owned policy bank and CEFC’s biggest creditor, has taken over the daily operations of Ye’s company.

The group is being stripped bare to 98.3 billion yuan of outstanding debt, including 30.8 billion yuan of bonds.

Even more assets including 21.64 billion yuan of worldwide real estate will be up for sale, according to sources close to the committee.

Further Reading: Sale of missing CEFC Chinese oligarch’s Manhattan pad, Hong Kong office and global real estate triggered by bond default

That includes a luxury apartment in New York’s Upper East Side near the United Nations headquarters, a mountainside villa in Lisbon, prime offices in Hong Kong’s Wan Chai district, flats in Cyberport and CEFC’s corporate headquarters in the former French Concession in Shanghai, according to an inventory obtained by the South China Morning Post.

Hengli Group, a private oil and chemical conglomerate in Jiangsu province, is in talks to take over the Abu Dhabi National Oil stake from CEFC, according to sources familiar with the sale.

Citic, the Chinese government’s largest investment arm, with businesses that stretch from satellites to real estate, would be the white knight coming to CEFC’s rescue.

“The reason for us taking over the assets is to preserve China’s investment in Europe, and to safeguard China’s image as an overseas investor,” said Chang Zhenming, chairman of the conglomerate, during a press event this week in Hong Kong.

“Citic Group is in talks on taking over some assets from CEFC China, but this is not yet completed ... there is still a long way to go, the price has yet been agreed,” he said.