HNA’s debt shrinks for the first time as one of China’s biggest asset buyers reverses course

Though HNA Group managed to reduce one of China’s biggest debt piles by selling dozens of assets, the embattled Chinese conglomerate will probably need to get much slimmer before regaining the trust of investors.

Total debt fell 9.5 per cent to 541.6 billion yuan (US$79 billion) at the end of June, down about US$8.3 billion from a record set at the end of last year, according to figures derived from a half-year report dated Friday. It’s the first time the number has fallen, based on public data compiled by Bloomberg stretching back to 2005.

The lighter load may ease the pressure on HNA, which is seeking to recover from a binge that involved borrowing tens of billions of dollars to fund purchases ranging from big stakes in Deutsche Bank to skyscrapers in Manhattan. But debts remain high and the results weren’t enough to shake off concerns about the company.

“The improvement does not appear material enough and management perhaps needs to do more,” said Warut Promboon, managing partner at credit research firm Bondcritic. “Asset sales are a good step in the right direction.”

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

The company, along with the likes of Dalian Wanda Group and Anbang Insurance Group, is now reversing course after spearheading an unprecedented shopping spree of high-profile assets worldwide, which ultimately drew the ire of the Chinese government amid concerns about unsustainable debt levels.

HNA has sold more than US$17 billion in assets this year - much of it coming from the sale of its holdings in Hilton Worldwide Holdings and its spin-offs - according to a Bloomberg tally. More disposals are on the way after the company agreed to unload billions of dollars worth of shares in Avolon Holdings and the Radisson hotel chain. HNA is also seeking to sell buildings across America, London and China, people familiar with the matter have said.

In another tailwind, China’s leaders were said to have agreed in June for the government to help HNA raise funds as long as the company sells out of non-core industries, stops diversifying through acquisitions and sticks to its main travel business.

“I am optimistic they can improve their financial situation,” said Andrew Collier, managing director at Orient Capital Research. “HNA’s total debt is likely to decline due to asset sales. They also are getting significant support from Chinese banks, which will support their working capital.”

Yet challenges abound. HNA is still burdened with one of the largest interest expenses in the world. The payments, which it reduced by 7.4 per cent from a record set the previous semester, ranked as the highest among non-financial companies in Asia, according to data compiled by Bloomberg as of Saturday. HNA also ranked No. 1 in Asia last year.

Its cash, equivalents and short-term investments dropped to 128.1 billion yuan, not enough to cover HNA’s short-term debt. The total debt figure also remained as one of the biggest for a non-financial company in Asia and was more than triple that of fellow Chinese conglomerate Fosun International.

Beyond financial challenges, HNA has been roiled by the sudden death of 57-year-old Co-Chairman Wang Jian in July, a tragedy that threw a wrench at the company’s normalisation plans as Wang was said to be the mastermind behind the purchase of many of the assets that are now being sold.

Chairman Chen Feng has since stepped up, promoting two family members as key lieutenants in August and tightening his control over the group as he seeks to persuade banks, investors and the government to restore their confidence in HNA.