Grant's Interest Rate Observer

More China Creditor Concerns

Sweet and sour

Even in friendly markets, borrowing has its limits.  That axiom is increasingly demonstrated by a trio of acquisitive and privately held Chinese conglomerates, all former high flyers who have run afoul of creditors in recent weeks.

Dalian Wanda Commercial Property, a subsidiary of tycoon Wang Jianlin’s Dalian Wanda Group (the largest property holder in China with over 300 million square feet under its dominion), saw its credit rating cut to double-B-plus from triple-B at Fitch today after the company missed a regulatory window (it expired on Dec. 31) to issue senior notes.  Fitch notes that: “Wanda’s liquidity position may come under substantial pressure if its offshore syndicated loan lenders demand for early repayment and Wanda fails to meet these demands promptly; or it fails to raise sufficient offshore liquidity to repay the $510 million second tranche of its offshore syndicated loan due in March 2018.” Following its downgrade, the second since 2016, Fitch kept Dalian Wanda Commercial Property on watch negative.

Last week, Chinese state media website The Paper reported that Wanda’s Internet Technology subsidiary will cut at least 1,000 jobs this year (it currently employs about 6,000), while Variety suggests the total could be much higher: “Some employees who joined less than a year ago were asked instead to ‘resign’ from their current positions. Including these, the staff numbers could fall from 6,000 at present to just 300, a 95% reduction.” Qu Dejun, president of Wanda Internet Technology Group, confirmed on his WeChat social media account that: “The group is readjusting in order to better develop more quickly and in a healthy manner.”

Tech-focused LeEco, which American website CNET described in 2016 as an “Apple-Samsung-Netflix-Tesla mashup”, has left creditors and suppliers alike in the lurch after its listed subsidiary, Leshi, reported a RMB 637 million ($96 million) loss in the first half of 2017.  In July, a Chinese court froze $180 million of assets owned by co-founder Jia Yueting and his wife following missed loan payments, while a month ago regulators ordered Jia to return to the country to attend to his unpaid debts.  Instead, Jia authorized his wife and brother to negotiate on his behalf, writing on his Weibo social media account that he needs to remain in the U.S. due to the “immense work” that is required for his electric car startup, Faraday & Future, Inc.

The Financial Times on Dec. 26 noted how LeEco’s troubles shine a spotlight on China’s less than streamlined bankruptcy system. Dan Harris, a lawyer who specializes in China, told the FT that: “Near as I can tell, [the bankruptcy process] doesn’t really exist. It’s there on paper, and I vaguely recall hearing of a few cases, but for the most part, it is ignored.” Shaun Wu, a Hong Kong-based lawyer, added that: “Creditors feel they must move swiftly and aggressively to safeguard their interests in China. There is less of a willingness to stand in line and wait for everything to be sorted.”  

Perhaps the most prominent of the now-flagging Chinese conglomerates is HNA Group Co. HNA, which jumped to 170th in the 2016 Forbes 500 list of the world’s largest corporations from 464th two years prior, reported $53 billion in revenues for 2016 while making high profile deals such as buying a 25% stake in hotel chain Hilton Worldwide Holdings, Inc. from the Blackstone Group LP for $6.5 billion in cash.

Financial gravity appears to be kicking in.  After three of its subsidiaries (Tianjin Airlines Co., Hainan Airlines Holding Co., and Bohai Capital Holding Co.) abandoned plans to issue debt in December, the Wall Street Journal reported on Dec. 29 that HNA pledged its Hilton stake as collateral for additional funding from a lending group led by JPMorgan Chase & Co.  Today, the WSJ reported that HNA is in arears on short term loans it obtained from individual investors, including its own employees, via JBH.com, its own online lending platform.

Christopher Whalen, publisher of the Institutional Risk Analyst, interrupted his vacation to tell Grant’s that the HNA saga is well worth keeping tabs on, as the aftermath of last fall’s 19th Party Congress and President Xi’s apparent consolidation of power may allow Beijing to avoid riding to the rescue:

The rise and fall of Chinese conglomerate HNA is instructive for investors and Sinologists alike. Neither a private company nor explicitly sovereign, HNA grew to gigantic size during China's period of financial liberalization. Now with newly enthroned Emperor Xi Jinping restricting financial activities abroad, HNA may be the first significant default event of 2018.