At his peak , less than ten years earlier, Chen Feng seemed like an unstoppable warrior on a quest to conquer the world.
HNA Group Co., the conglomerate that Chen and its former partner Wang Jian was the first to establish Hainan Airlines in 1993, has become the mainstay of a group of businesses that have collected prizes across to the United States. From Europe. The wave of acquisitions represents the debut to Europe of China Inc. on the global stage. It is supported from Wall Street, the globe-trotting mogul has also been in contact with influential leaders, such as the president Xi Jinping and David Cameron who was his former British prime minister.
Then all of it collapsed in the midst of one of the largest corporations’ debts around this resource from Bankruptcy HQ from the globe. The pandemic struck the death knell to HNA that had tried to sell assets while its liabilities were looming. In February of 2020, HNA was effectively seized from the administration of the Chinese island Hainan in which it is located as well as the tourist and aviation operations of the company were halted due to the suspension of travel and are currently being transformed.
Being ostracized by the authorities when they were brought in, Chen, 68, is at a crossroads. Chen was arrested alongside together with HNA CEO Tan Xiangdong for unspecified crimes The company announced the news Friday night, and was caught up in the massive crackdown on businesses in Beijing. This comes at a time when another conglomerate that is heavily indebted, China Evergrande Group, is facing a financial decision which crosses international markets, raising questions regarding the likelihood that Beijing is going to intervene.
Industries that are critical
Chen along with his group were among the many billionaires, business giants and empires that arose through the decades of liberalization in China after the demise of Mao Zedong. While the Chinese state has often offered favorable policies and tapped corporations to increase China’s position in crucial industries but China’s Communist Party remains wary of the power of corporations and the possible threat to financial stability. It’s a mistrust that is currently manifesting under its control of Alibaba Group Holding Ltd., Didi Global Inc. and other companies.
However, unlike the tech giants, their success and power over large data has made them an easy target HNA has attracted the attention of the authorities because of a different reason. Under the direction by Chen and Wang the HNA group profited from the ease of credit that was flooding China throughout the 1920s, to fund numerous acquisitions overseas. Deals that exceeded 40 billion comprised significant stakes Deutsche Bank AG and Hilton Worldwide Holdings Inc., high-end properties, such as golf courses, famous hotels on six continents as well as the towering skyscraper. 648-foot 245 feet Park Avenue in Manhattan.
When Beijing recognized the dangers of capital flight and leverage, it started to take action against large buyers. The top-rated insurance company Anbang which is the proprietor of the Waldorf Astoria hotel in New York City was taken over by the federal government in 2018. The slow-motion destruction of HNA started shortly thereafter and resulted in the loss of assets due to. The debt repayment deadline was in the near future. The company is still facing at least $63 billion in debts by its debtors.
“Chen utilized the same strategy as other businessmen with connections to the political sphere – they utilized their connections to obtain the most money they could from state-owned financial institutions.” Victor Shih, associate professor who specializes in Chinese political elites and financial policy in the University of California at San Diego told the media in an interview shortly before Chen’s arrest. “The manner these companies used leverage to swiftly pay for foreign assets was not sustainable and led to catastrophic deleveraging.”
Debt was at the heart of Chen and Wang’s plans. Both fervent Buddhists and Buddhists, they determined to help HNA to be one of the most prestigious Fortune 500 companies. The expansion fueled by credit allowed the company to climb the 183rd spot to be ranked 170th place in 2017. However, it the company was also destined to fail in a matter of months when debt soared to nearly $ 93. billion in the year following.
Born in Shanxi the coal mining center, Chen grew up in Beijing and then graduated from Lufthansa College of Air Transport Management in Germany. He worked for the Civil Aviation Administration of China as well as the National Aviation Regulation Bureau before entering business in the private sector. Around 1990, he assisted create a company that eventually became the flagship product of HNA, Hainan Airlines Holding Co. In addition, he was an aviation business consultant for the governor of Hainan.
In the beginning of its expansion, HNA managed to secure billionaire George Soros as an investor that was a huge win for a regional airline with only 10 million dollars (1.5 million dollars) 1.5 million) of support from the government in the early days. Chen soon became the most sought-after of China’s burgeoning business community, establishing an attractive and friendly image during interviews. Chen served snacks and drinks during Hainan Air flights, posing for cameras.
Chen is an “incredibly efficient speaker and a powerful selling agent to HNA and its goals,” said William Kirby an Harvard Business School professor who has been acquainted with Chen for a long time and invited him to speak to many sessions. .
The company’s plans to expand its reach beyond the aviation industry – and even the outer limits of China started in 2007 when it bought the SA Sode hotel in Belgium as one of its initial assets in the expense of foreigners. Others followed, including the acquisition of Deutsche Bank AG which made HNA the biggest investor in Deutsche Bank AG, the German bank at that time. The stake was a highly-preferred “collar” strategy that was popular with Chinese leveraged buyers , and resulted in HNA retain the majority of its stake in put options, which are derivative contracts.
Chen was not perturbed by the accrual of debt. In an interview with the state-run China Central Television in 2004 Chen compared leverage to lice. When you’re able to borrow this much, “you don’t feel itchy no more. If you’ve borrowed that many times, you’ll be able to lay in bed in the late at night.
The company’s financial troubles started to surface in the middle of 2017. HNA, Anbang and others started to sell their assets, and also cancelling certain of their major purchases to reduce the debt. Though people who were familiar with the discussions in 2018 claimed that China’s top leaders had agreed to assist HNA raise fundsand provide an insurance policy, the plan was not realized.
“HNA was increasing faster than management skills,” said Warut Promboon who is the director of the Hong Kong-based credit analysis company Bondcritic Ltd. “The government employed HNA to boost China’s influence. However, this must be accompanied by the overall health of the business.
The troubles grew worse in July of 2018 after Wang died while traveling in the south of France. He was age 57. The police in the area said that the HNA co-chair was thrown from fifteen meters (49 feet) when he was photographed in the town of Bonnieux. Then, a few months after it was reported that the French daily Liberation said the incident was suicide.
Wang’s death added an additional level of intrigue for HNA that was in the midst of an increasing number of concerns about its ownership structure and the alleged financial ties it had with Communist Party leaders. The apparent connections to power offered many bond investors a sense of security knowing that Beijing will be able to help HNA in the event that it ever ran into problems in its debt.
Then, these investors will discover that their optimism was not true. Since the HNA was taken over by the authorities the HNA and enlisted in restructuring, accusations of financial mismanagement during the old regime have surfaced.
In February, in exchange documents three HNA units claimed that certain owners and their affiliates allegedly embezzled at minimum the sum of 63 billion yuan (approximately 9.7 billion) in cash, and they did not disclose 46 billion yuan worth of loans as guarantees. On the same day after the arrest of Chen was made public, Chinese magazine Caixin reported that several related party transactions, such as those connected to HNA’s acquisitions of foreign companies were not fully divulged to regulators. .
An investigation of company documents and conversations with various former and current executives showed that Chen together with Wang and a few high-ranking executives, owned businesses controlled or owned through family members that had done business with HNA according to Caixin. . The complicated web of related-party transactions led to the fact that HNA could have received up to fifty percent higher than rivals for aviation equipment, as well as 10% higher for aircrafts according to an ex- HNA executive who know who was quoted by Caixin.
HNA representatives have declined to comment.
With Chen currently in custody along with Tan who is Tan is a US citizen, as per documents submitted to the Securities and Exchange Commission – HNA is now under the control of the federal government. Its Hainan headquarters, popularly designed in the shape as an reclining Buddha according to local news media is filled with officials who have negotiated the sale of stakes in the airport and airline operations in March and intend to reform the business. Group into four independent firms. The units.
Although his daughter Chen Xiaofeng remains on the board, the detention of Elder Chen makes him distinct from HNA. His treatment is like the treatment of the former Anbang President Wu Xiaohui, who was sentenced to 18 years of prison in 2018 for embezzlement and fraud.
Businesses with high levels of debt may suffer the fate of HNA The Bondcritic’s Warut said.
“Without any explicit assurance that we could expect the government to help the company out,” he said. HNA “sets the bar for how companies be restructured, and investors are aware that this could be the case for several businesses across China.”