Chen Feng, founder of the debt-laden Chinese airlines-to-finance group HNA that spent tens of billions of dollars on deals in the middle of the last decade, including Irish aircraft lessor Avolon, declared in December that one of the worst bouts of corporate indigestion globally in recent times was set to ease.
“2020 is the decisive year to win the war against the liquidity problem,” the former People’s Liberation Army pilot said in a note posted on messenger app WeChat in the dying days of last year.
That was before the coronavirus outbreak hit the world’s second-largest economy, grinding it to a virtual halt.
On Thursday, it emerged that the Chinese state was preparing to step forward and seize the long-embattled company – one of the country’s largest private conglomerates.
In truth, Beijing officials has been pulling strings behind the scenes since HNA began selling off assets at pace in 2017 to remain afloat. It comes after a $40 billion (€37 billion) acquisitions spree – including stakes in Hilton Worldwide, Deutsche Bank, and trophy properties from London to New York – left it about $80 billion of unsustainable net debt.
Embarrassing as it has been for authorities to see some HNA affiliates miss debt payments in the past 18 months, investors had taken general comfort in the fact that the group’s web of companies, opaque and baffling as they are to the outside world, maintained close government ties.
It was seen as offering an implicit guarantee – albeit something that may have encouraged HNA’s reckless dealmaking binge in the first place.
But it’s now clear that the Chinese state – fighting a two-fronted battle to contain the spread of the Covid-19 virus and limit the fallout from the crisis on the economy – is concerned enough about the systemic risk this group poses to its financial system to formally step in.
HNA's starting business and historic crown jewel, Hainan Airlines, is said to be especially vulnerable, with the Wall Street Journal reporting that the government could use the crisis to allow three state-run carriers, Air China, China Eastern Airlines and China Southern Airlines, to carve up the company's routes between them.
Cash-strapped Hong Kong Airlines, also part of the HNA, had already announced earlier this month that it was cutting more than 10 per cent of its 3,500-strong workforce as the effect of the coronavirus added to woes created by prolonged political protests and unrest in Hong Kong.
Meanwhile, it's likely that Avolon, founded 10 years ago by a team of aviation veterans led by Clareman Domhnal Slattery before being sold to HNA-controlled Bohai Leasing in a $2.6 billion deal in 2016, will soon find itself on the market again.
The most likely suitor must be Japanese financial services group Orix, which brought 30 per cent stake in Avolon in late 2018 from Bohai, for $2.2 billion under HNA's debt-reduction drive. It was one of the assets snapped up by the Chinese group during its deals phase that actually grew in value under its control.
Slattery signalled last week that the fallout from the coronavirus could benefit Avolon as Asian airlines – which have seen their cash flows slump and forward bookings dry up – seek sale-and-leaseback deals to raise money.
“We never set out to exploit or anything like that in a scenario like this, but obviously the risk profile is changed as a consequence of (the virus) so they tend to be strong transactions from our perspective,” he told Reuters.
With access to $6 billion of cash, Avolon’s sees itself as being in strongest position among lessors to take advantage of the situation.
It’ll need to be cautious in this environment – especially after securing an investment grade from credit ratings agencies last year – in picking the right carriers to back.
Insourcing pays off for Eir
Former telecoms monopoly Eir's commitment to penny pinching under the control of Frenchman Xavier Neil over the past two years appears to be paying off.
The company said this week that it shaved €12 million – or 45 per cent – off its sales and marketing cost in the six months to the end of December, compared to the same period in the previous year, by its decision in 2018 to stop using media-buying agencies and buy all its ads in house.
Customer services costs dropped by 67 per cent, or €11 million, as it bought hundreds of staff back into the company after cancelling an outsourcing call-centre contract. And a further €4 million was chipped off its accommodation bill as it tweaked its property portfolio.
It all served to reduce Eir’s non-pay costs by 23 per cent to €108 million, as pay expenses increased by a little over 15 per cent to €83 million, resulting in an overall €22 million saving.
The efforts averted a drop in earnings before interest, tax, depreciation and amortisation at Eir and helped deliver a 1 per cent increase in this line, to €289 million, for the six months.
Turning around sales, which fell 3 per cent to €615 million in a competitive market during the period, may prove more difficult.