China’s First Corporate Fatality
A massive Chinese air carrier just went under, completely bust due to a lack of flyers. COVID-19 was the Black Swan event, but the company’s “too big to fail.” Get ready for state intervention – China style!
Twenty years ago, officials in Beijing said: “let there be a new regional airline.” And China had a new regional airline. A couple approved entrepreneurs won the trust of local government, and with the seed money of legendary investor George Soros, formed HNA group (or ‘Hainan Airlines’). It did very well.
Routes multiplied with sales, economic growth in the region practically putting success on a plate for the ambitious tycoons. Airlines were in fashion, a hip industry in hyper-growth, but eventually that got boring. Feeling invincible, HNA started branching out on a mission to be “one of the top fifty companies in the world” by 2030.
The airline went binge buying with other people’s money on an acquisition spree similar to many Chinese companies over the years. First, a stake in Uber. Then, a Hollywood studio. The Waldorf Astoria hotel in New York City. And the AC Milan soccer team? Yes, please!
Over 93-billion-dollars has been shelled out over fifteen years for trophy assets. It’s led to a mountain of debt, and huge shareholder positions in numerous Western mega-cap stocks like Hilton Worldwide and Deutsche Bank. Introduce a coronavirus to the picture, and HNA Group goes past a dangerous tipping point.
This virus has halted four in every five flights to and from China. Hainan Airlines’ core business isn’t moving, and none of its debt can be paid back. As you might imagine, heads are turning at a central government level.
An omnipotent regime isn’t going to watch idly as incompetence beneath it threatens the economy. The Chinese Communist Party (CCP) no longer “digs” HNA’s vision to be the biggest and best, and has forcefully taken over the company. In the West, bankrupt firms are left to their own devices. But President Xi believes HNA is “too big to fail.” He’s getting hands-on with the sell-off of Hainan’s planes, hangers, and ticket desks.
The debtholders are happy, more likely to be fully bailed out, and investors in Hilton Worldwide and Deutsche Bank are less worried about technical disruption. Hilton even found a way to end Friday’s killer session higher.
Bondcritic managing partner, Warut Promboon, fears “what’s happening in this extreme story is just the tip of the iceberg. This is what’s coming for a lot of companies in China,” so investors are earmarking Asian stocks that could be about to crumble. Potential short-selling opportunities?
