(Bloomberg) — In his heyday, less than a decade ago, Chen Feng seemed like an unstoppable man on a mission to take over the world.
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HNA Group Co., the sprawling conglomerate Chen and his late partner Wang Jian helped start it as Hainan Airlines in 1993, becoming the standard-bearer for a cabal of companies taking trophies from the US to Europe. Their wave of takeovers symbolized the arrival of China Inc. on the world stage. Courted by Wall Street, the global tycoon also bumped into powerful leaders, including President Xi Jinping and David Cameron, the former British Prime Minister.
Then it all collapsed under one of the world’s largest mountains of corporate debt. The pandemic was the death knell for HNA, which was already selling assets as its liabilities loomed. Effectively seized in February 2020 by the government of the Chinese island of Hainan, where it is based, the group’s aviation and tourism businesses were crippled by the cessation of travel, and it is now under restructuring.
Chen, 68, has already been sidelined as officials moved in and has come to the end of the line. The chairman, along with Tan Xiangdong, the chief executive officer of HNA, was detained for unspecified crimes, the company said late Friday, mired in the crackdown by companies in Beijing. It also comes as another heavily indebted conglomerate, China Evergrande Group, faces a financial reckoning that is sweeping global markets, raising questions about whether Beijing will step in.
Chen and his group were among the countless billionaires and business empires that have emerged from China’s decades of liberalization since Mao Zedong’s death. While the state has often dangled favorable policies and used corporations to advance the country’s position in critical industries, the Communist Party remains suspicious of corporate power and the potential threat to financial stability. It is a caution that is now playing out in the curb of Alibaba Group Holding Ltd., Didi Global Inc. and others.
But unlike the tech giants — whose success and control over big data have targeted them — HNA caught the attention of the government for a different reason. Led by Chen and Wang, the group took advantage of the easy credit that roamed China in the 1920s to fund a series of overseas acquisitions. Deals worth more than $40 billion include significant stakes in Deutsche Bank AG and Hilton Worldwide Holdings Inc., luxury properties such as golf courses, historic hotels on six continents and Manhattan’s 245-foot skyscraper 245 Park Avenue.
Read Businessweek’s dive into the rise and spectacular fall of HNA
When Beijing became aware of the risks of such capital flight and leverage, it began to curb the big buyers. The high-flying Anbang Insurance Group, which owns the Waldorf Astoria hotel in New York, was seized by the government in 2018. Soon after, HNA’s slow-motion unraveling began, divesting assets as debt payments loomed. The group is still facing at least $63 billion in creditor claims.
“Chen shared the same strategy as many businessmen with political connections — they used their connections to borrow as much money as possible from state financial institutions,” said Victor Shih, an associate professor specializing in Chinese financial policy and elite politics at the University of California at San Diego, said in an interview before Chen’s detention. “The way these conglomerates used leverage to quickly overpay for foreign assets was unsustainable and resulted in catastrophic deleveraging.”
Debt was the basis for Chen and Wang’s ambitions. Both devout Buddhists had their sights set on HNA to become one of the top companies in the Fortune 500. Thanks to its credit-driven expansion, the conglomerate rose 183 places to 170th in 2017, but also sealed its fate within months as debt rose to more than $93 billion the following year.
Born in the Chinese coal mining center of Shanxi, Chen grew up in Beijing and graduated from Lufthansa College of Air Transport Management in Germany. He held positions with the Civil Aviation Administration of China and the National Air Regulations Bureau before venturing into the private sector. Around 1990, he helped establish a company that later became HNA’s flagship Hainan Airlines Holding Co. while serving as an aviation adviser to the governor of Hainan.
During the early days of its growth, HNA managed to bring in billionaire George Soros as an investor, which was a coup for a small regional airline with only 10 million yuan ($1.5 million) in government support at the time. Chen quickly became the toast of China’s emerging business community, cultivating a dynamic and accessible image in interviews. He would serve drinks and snacks on Hainan Air flights, posing for the cameras.
Chen was an “incredibly effective speaker and salesperson for HNA and its aspirations,” said William Kirby, a Harvard Business School professor who has known Chen for years and invited him to speak at several of his classes.
HNA’s ambitions to go beyond aviation — and the borders of China — began in 2007, when SA bought Sode Hotel in Belgium, one of its first overseas assets. More deals followed, including the investment in Deutsche Bank AG, making it the largest shareholder of the German lender at the time. The stake then employed a “collar” strategy that was popular with leveraged Chinese acquirers, and saw HNA acquire most of its stake through derivative contracts known as put options.
Chen was unfazed by the mounting debt. In an interview with the state broadcaster China Central Television in 2004, he compared leverage to lice. When you have that many, “you don’t itch anymore. When you borrow that much, you can fall asleep at night.”
The conglomerate’s financial problems began to emerge in mid-2017. HNA, Anbang and others began selling their assets and settling some of their largest purchases to repay debt. Although people familiar with the discussions in 2018 said that China’s top leaders had agreed to help HNA raise funds and provide a safety net, that did not happen.
“HNA expanded faster than management expertise,” said Warut Promboon, managing partner at Hong Kong-based credit rating agency Bondcritic Ltd. “The government used HNA to expand China’s influence, but it had to go hand in hand with the health of the company.”
The unrest intensified in July 2018, when Wang died while on holiday in the south of France. He was 57 years old. According to local police, HNA’s co-chair fell from a height of 15 meters (49 feet) while being photographed in the village of Bonnieux. Months later, the French daily Liberation reported that it was a suicide.
Wang’s death added an additional layer of intrigue surrounding HNA, which was faced with a mounting drumbeat of questions about its ownership structure and its alleged financial ties to communist party leaders. Its alleged connection to power gave some bond investors a sense of certainty that Beijing would come to the rescue of HNA if it ever ran into trouble with its debts.
Soon, those investors would discover that their optimism was misplaced. Since authorities took control of HNA and plowed it into restructuring, allegations of financial mismanagement under the original regime have surfaced.
In exchange filings in February, three HNA units claimed that some shareholders and affiliates embezzled at least 63 billion yuan ($9.7 billion) in funds and failed to disclose about 46 billion yuan in debt guarantees. On Saturday, the day after Chen’s arrest was revealed, the Chinese magazine Caixin reported that dozens of related party transactions, some related to HNA’s overseas acquisitions, had not been fully disclosed to regulators.
An investigation of the company’s records and interviews with multiple former and current executives found that Chen, along with Wang and several senior executives, owned companies that were controlled or invested in by family members who did business with HNA, Caixin said. The complex network of related party transactions meant that HNA paid perhaps 50% more than competitors for aerospace materials and 10% more for aircraft, said Caixin, a former HNA director who was not identified.
HNA representatives declined to comment.
With Chen in police custody with Tan — a US citizen, according to Securities and Exchange Commission filings — HNA is firmly in government hands. Its headquarters in Hainan, whose famous shape has often been compared by local media to a seated Buddha, is now overrun by officials, who earlier this month negotiated the sale of stakes in the airline and airport operations and plan to close the group. restructuring into four independent companies. units.
While his son Chen Xiaofeng remains on the board of directors, the detention of the elder Chen separates him from HNA. His treatment is similar to that of former Anbang chairman Wu Xiaohui, who was sentenced to 18 years in prison in 2018 for fraud and embezzlement.
More highly leveraged companies could meet HNA’s fate, Bondcritic’s Warut said.
“Without an explicit guarantee, the government should not have been expected to come to rescue the company,” he said. HNA “prioritizes that companies can undergo restructuring so that investors know that these things can happen to many companies in China.”
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