By Matthew Miller
BEIJING (Reuters) - HNA Group, the high-flying Chinese conglomerate caught in the cross-sights of Beijing, has hit turbulence as deals stall and scrutiny of its finances and shareholding structure intensifies.
Beijing's clampdown on highly-leveraged foreign investment has led to more regulatory scrutiny around the world, putting the brakes on a remarkable period of growth that saw HNA announce $50 billion of acquisitions in just over two years.
New deals have dried up and investment banks like Goldman Sachs and Bank of America Merrill Lynch have grown wary of working with the company that has sprawling interests in aviation, logistics and tourism.
HNA's long-term strategy of debt-fuelled growth, which peaked with its purchase of stakes in Hilton Worldwide Holdings and Deutsche Bank, is fraying, compounding the company's problems as it struggles to allay concerns over its opaque shareholding structure.
A plan to publicly list Pactera, a Chinese technology services company HNA bought last year, was suspended this month after Goldman Sachs said the deal failed to meet its internal due diligence requirements.
HNA has defended its health, saying it maintains strong working relationships with more than 300 financial institutions and has a healthy line of credit.
"A lot of the stuff going on in the media is just perception, and that perception doesn't accurately reflect our business," said Guang Yang, chief investment officer of HNA Capital, the company's financial arm. "Our business continues to be very strong."
HNA bonds have dipped slightly since the extent of Beijing's crackdown on debt became clear. Two bonds from HNA Group and Hainan Airlines due in 2018, for instance, are being bid at under 99 cents on the dollar, versus around 100 in June.
Finance costs have soared to 14.19 billion yuan in the first half of 2017, from 6.47 billion yuan in the year-earlier period, as HNA completed acquisitions and utilized 454.5 billion yuan in credit.
Shareholder equity now finances 40 percent of 1.21 trillion yuan in total assets, with the rest coming from borrowed funds, after stakeholders injected 488.5 billion yuan into the company last year.
Some western bankers say their ability to work with HNA is limited by lingering questions about the company's dependence on leverage.
"International banks are reluctant to do any new business," said a senior banker with a European lender, requesting anonymity because he was not authorized to speak with the media. "The regulatory environment has changed."
Brock Silvers, managing director at Kaiyuan Capital in Shanghai, said a main concern for Beijing was "whether HNA's aggressive financial structure could result in a domino effect through its tightly levered and pledged portfolio, putting Chinese investors and bank capital at risk."
HNA investments controlled by unlisted domestic subsidiaries with little track record and lacking offshore regulatory oversight are a particular concern, bankers say.
"Nobody really knows how much leverage they have," said Andrew Collier, managing director at Orient Capital Research in Hong Kong. "They use all of these off-balance sheet companies to raise a lot of capital."
Another concern for regulators and bankers is the company's opaque shareholder structure.
Last week, the Swiss Takeover Board asked HNA to clarify its ownership by Oct. 3 given apparent changes since its $1.5 billion takeover last year of the aviation services company Gategroup.
HNA announced in July that a New York-based foundation controlled by HNA management would act as its largest stakeholder. But the move raised questions about individuals who had been holding the shares previously and their role at HNA.
Under the restructured shareholding, a dozen senior executives - led by the founding chairmen Chen Feng and Wang Jian - hold a combined 47.5 percent stake in the group, with the New York foundation and a China-based charity holding the bulk of the rest.
All this comes as the company is undertaking U.S. government reviews for its proposed acquisition of SkyBridge Capital, a hedge fund platform, from Anthony Scaramucci, and a bigger stake in Old Mutual's U.S. asset management unit.
HNA abandoned a bid for Global Eagle Entertainment Inc, an in-flight services company, after failing to get U.S. regulatory approval in July.
HNA's debt-fueled strategy peaked this year with the Hilton and Deutsche Bank deals, and buyouts of the U.S. technology provider Ingram Micro and CIT Group's aircraft leasing business.
HNA Group, which controls 19 listed companies, reported that total debt doubled to 717.99 billion yuan at the end of June from the end of 2015. Total assets increased 157 percent to 1.21 trillion yuan.
At Bohai Capital Holding Co, which oversees HNA's aviation and container leasing businesses, the debt-to-asset ratio reached 87.6 percent, with short-term borrowing of about 34 billion yuan, according to its latest filing.
Moody's Investors Service in September warned that "Bohai's high leverage, reliance on short-term financing and high debt-funded growth represent a risk."
But it also upgraded its ratings for Bohai's Avolon airplane leasing unit, expecting the company to "strengthen its financial profile," citing, among other things, "slower growth as a result of reduced debt-funded acquisitions."
HNA's debt-driven growth strategy dates from 2003, when Hainan Airlines, the HNA Group flagship that counted George Soros as an early investor, was battered by the SARS outbreak.
"We came up with the idea, why don't we leverage ourselves," HNA's chief executive, Adam Tan, said in April. "We can leverage this business” against the "ups and downs" of the airline business.
The vehicle was HNA Group, which invested in airlines, airports, tourism, and real estate in China and around the world.
Domestic deals have often been backed by guarantees provided by other HNA companies. Abroad, the group started using cross-border standby letters of credit, backing offshore hard-currency debts with onshore cash deposits.
More recently, HNA has turned to structured deals like loans guaranteed by acquired assets and share pledges, often combined with hedging strategies, corporate filings show.
HNA secured a $3 billion margin loan, for example, to help finance its $6.5 billion Hilton share acquisition, pledging its entire shareholding to a consortium of banks.
In August, to acquire stakes in Deutsche Bank and Dufry AG, an airport shop operator, HNA used equity margin financing, backed by an equity collar, a hedging strategy.
Amid all the scrutiny, Yang of HNA Capital said the company was pressing ahead with some deals.
HNA this month took control of Frankfurt-Hahn Airport in Germany, a $16 million deal. HNA Holding Group Co is also moving forward with a $1 billion takeover of the Singapore-listed logistics company CWT Ltd
"The company is in great shape," Tan, the chief executive, said in July. "We're going to keep on going."
(Reporting By Matthew Miller. Umesh Desai contributed reporting.; Editing by Philip McClellan)