(WSJ) As Chinese investment overseas surged last summer, one of the most aggressive of those investors, airlines-to-hotels conglomerate HNA Group, got an ultra flashy private jet.
A 2,408-square-foot Boeing 787 Dreamliner that normally seats 300, the plane was tricked out with $100 million worth of features such as marble-laminated bathrooms, Hermès flatware and Baccarat crystal. HNA planned to charter it to rich clients as well as to its own executives, according to people familiar with the plane and promotional videos.
Since then, China's outbound fever has cooled. Most Chinese deal makers have reined in purchases abroad after the government—worried about capital outflows—took steps to curb them.
Yet HNA has still managed to keep up a steady flow of overseas purchases—albeit smaller in size than some of the multibillion-dollar deals it signed last year. And the Dream Jet has been busy ferrying executives and clients around the world: during the past few months, plane-tracking sites show it hopping from Shanghai to New York, Denver, San Francisco and Hawaii.
"The company is progressing restlessly," said Gao Jian, the group's chief operating officer, who says he flew on the plane last year. "Everyone is passionate, full of hormones, dying to achieve things."
Based in China's Hainan province, closely held HNA Group started out as a local airline operator but now aims to become one of the globe's biggest international conglomerates. It has expanded into hotels, tourism, logistics, real estate and finance. Its total assets, at around $146 billion in 2016, grew more than four times since 2010, when the company first started acquiring overseas companies. Its roughly $90 billion revenue last year was also nearly 10 times the level in 2010. Some of HNA's most high-profile outbound acquisitions have been U.S.-based companies—a $6.5 billion purchase of a 25% stake in Hilton Worldwide Holdings Inc., a $6 billion deal to buy technology distributor Ingram Micro Inc. and a $4 billion purchase of CIT Group 's leasing business.
HNA is continuing to expand overseas, even as many other ambitious compatriots stall. Among China's erstwhile highfliers, Dalian Wanda Group Co., a big acquirer of Hollywood companies, earlier this year canceled a $1 billion purchase of U.S. production company Dick Clark Productions Inc. after it couldn't get Chinese government approval to move the funds overseas.
HNA has borrowed heavily to acquire more assets, many of them overseas. Recently, it has been tapping cash from those global operations or using them to help raise funds for more purchases, letting HNA largely sidestep China's increasingly strict capital controls, bankers say.
The HNA Group and its subsidiaries hold around $9.7 billion in bonds, putting it among China's top 30 most indebted companies, according to Dealogic.
The heavy debt load has led at least one big Chinese bank to become more cautious about lending to HNA, said a senior corporate finance officer at the bank. HNA executives say the group is trimming its debt level.
To be sure, HNA hasn't been completely untouched by the outbound deal slowdown. Earlier this month, the group said it had to delay a planned $322 million purchase of a stake in a Swedish hotel group since it hadn't yet gotten approval to move the money out of China.
Still, HNA and its affiliates have announced eight outbound deals worth $4 billion since January, in countries from Poland to New Zealand, according to Dealogic.
The group is pushing hard in the U.S., where it has invested some $36 billion over the past six years, and has set up a unit of its finance arm, HNA Capital. The company has been making connections with U.S. financial and political power brokers, including Blackstone Group Chairman Stephen Schwarzman.
For deals, HNA is "the only game in town at the moment," said a senior M&A banker in Hong Kong, who has advised HNA on some of its purchases.
Some observers are speculating that HNA has gained an advantage through political ties. Chinese press attention has focused on the company's ownership and funding after Chinese real-estate-tycoon-in-exile Guo Wengui recently suggested, via Twitter and in an interview with Voice of America, that there are connections between HNA and a senior Chinese leader. The Dream Jet, he said, has been used as a venue for entertaining the leader's relatives. Mr. Guo didn't offer evidence for his claims. HNA declined to comment on Mr. Guo's claims.
HNA was co-founded in 1993 by former aviation bureaucrat Chen Feng on China's southernmost island province of Hainan. It currently has the company's employees and an HNA charitable foundation among its shareholders, according to HNA executives.
Initially formed with money from Hainan's local government to run its only airline, HNA's group holding company no longer has state ownership, HNA's Mr. Gao says. Its headquarters feature an eclectic mix of Roman columns, Taoist sculptures, a red-and-yellow chandelier designed by American glass sculptor Dale Chihuly and six giant works by Liu Yuyi, a Chinese painter known for his depictions of Mao Zedong and Communist themes.
HNA executives and bankers say a big reason for the group's continued ability to invest outside China is a hefty supply of overseas funds. That lets the group purchase in dollars without worrying about getting money out of the mainland past China's tightened capital controls, they say.
"For the last few deals, we financed everything from cash flow offshore," said Guang Yang, New York-based chief investment officer of HNA Capital. "We don't have to move [yuan] offshore."
This year, HNA Capital has reached deals to buy stakes in U.S. hedge fund of funds SkyBridge Capital, German lender Deutsche Bank AG and U.K. insurer Old Mutual PLC's U.S. fund-management arm.
HNA asks banks to put financing in place if they want an advisory role on its deals, Mr. Yang said. It issues a lot of bonds: Last year, HNA's debt equaled a relatively high 60% of total assets and around 10 times its earnings before interest, taxes, depreciation and amortization, or Ebitda, according to executives and an analyst estimate.
Recently, HNA's fundraising has become more creative. It has issued more than $3 billion of offshore debt backed by letters of credit from Chinese banks onshore, according to bond documents, a practice Chinese authorities started clamping down on several months ago. Around the time of its investment in SkyBridge, HNA raised $200 million from an offshore bond issued by a special purpose vehicle, which was backed by a loan from a Hong Kong subsidiary and guaranteed by China Construction Bank , according to S&P Global Market Intelligence.
The group has created offshore companies that can tap funding abroad to conduct purchases. In April, HNA used a newly incorporated entity in Singapore to make a nearly $1 billion acquisition of Singaporean logistics firm
The outbound push is changing HNA at home as well. HNA says about 70% of the group's 410,000 workers are based outside of the mainland, and that it last year pulled nearly half of its revenue from overseas. Mr. Chen has said he wants HNA to rank in the global top 10 companies by revenue during the next decade—executives say it is currently in the top 100.
HNA is pushing to internationalize in the mainland, assigning all its employees English names and mandating emails on Fridays be in English, executives and employees say. One recent hire in Beijing, Luxembourg native Jan Heidrich, says his manager told him on his first day to get colleagues used to foreign ways. "If your Chinese co-workers want to take you out for hot pot, take them to eat burgers instead," he recalls being told.
Source: Wall Street Journal by Kane Wu
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