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A $31 Billion Trading Halt Has Left HNA Investors Trapped

The HNA Group Co. building stands in Beijing, China. Photographer: Qilai Shen/Bloomberg


 March 14th, 2018  |  11:26 AM  |   275 views



HNA Group Co., the poster child for runaway corporate debt in China, is increasingly drawing attention to another of the nation’s financial ills: trading halts that leave stock investors trapped for weeks on end.


Seven listed units of HNA have halted their shares for seven weeks or more, creating the largest swathe of frozen stock tied to a single business group in China. The suspensions, which affect $31 billion of equity, have prevented minority shareholders from selling at a time of mounting financial stress for the aviation-to-hotels conglomerate.


"The stock is not supposed to be in our portfolio anymore, but we are stuck with it,” Zhao Danian, a money manager at Everbright Pramerica Fund Management Co. in Shanghai, said in reference to Hainan HNA Infrastructure Investment Group Co. Even though Zhao’s quantitative investment model no longer recommends Hainan HNA, the fund can’t sell because trading in the shares has been suspended since Jan. 23.


HNA’s units have all cited “major’’ restructurings for their halts, but analysts say other motives may be at play. One involves margin calls: HNA-related entities have pledged at least $12.7 billion of shares in the suspended units to creditors, exposing the group to demands for additional collateral -- or in extreme cases, forced sales of their stakes -- if recent losses in some of those shares were to continue, according to data compiled by Bloomberg.


“I suspect this was done to prevent forced liquidation by creditors,” said Victor Shih, a professor of political economy at University of California San Diego who studies China’s financial industry. He added that the halts were “sacrificing the interests of small shareholders.”

In an emailed response to questions, HNA said it has “robust” cash flows and support from a range of domestic and international lenders. The conglomerate, which has been selling assets to repay the debt it amassed during a global acquisition spree, declined to comment on the trading halts beyond what its units have disclosed in public filings. HNA also declined to comment on whether its units faced margin calls.


The China Securities Regulatory Commission and the Shanghai Stock Exchange declined to comment, while the bourse in Shenzhen didn’t respond to faxed questions.


Companies in China have a history of using trading halts to prevent their stocks from falling. At one point during the nation’s market crash in 2015, nearly half the country’s listed businesses suspended trading, eliciting widespread condemnation from international investors.


Regulators have since taken steps to contain halts as part of China’s campaign to gain entry into MSCI Inc.’s global stock indexes, but the value of frozen shares on the country’s exchanges still exceeds $456 billion, according to data compiled by Bloomberg. That’s 3,150 times more than in the U.S., where suspensions are capped at 10 days.


HNA’s lengthy halts “reflect poorly” on China, said Andrew Clarke, director of trading at Mirabaud Asia Ltd. in Hong Kong. “People look at the market and say, ‘It’s bloody easy to get in, but it ain’t that easy to get out.”’


HNA’s rationale for the trading halts in public filings, that the units are undergoing major restructurings, is boilerplate terminology in China that allows companies to suspend their shares for up to three months -- or even longer with approval from shareholders and the exchange.


Some of HNA’s restructuring efforts have involved little more than shifting assets from one unit of the conglomerate to another. Hainan HNA Infrastructure offers one example: in a stock exchange filing announcing a proposed extension of its trading halt last month, the company said it plans to buy retail assets from a related business.


HNA may have several reasons for such moves, said Chen Shujin, a Hong Kong-based analyst at Huatai Securities Co. By shifting assets between units, the group can deploy liquidity where it’s needed most. The stock halts, meanwhile, remove the near-term possibility of a selloff and could make it easier for the group to negotiate with lenders and other counterparties.


The halts may also help HNA fend off margin calls on loans backed by the frozen stock. At one of the suspended units -- HNA-Caissa Travel Group -- shares have dropped 52 percent on average since HNA-related entities pledged their holdings. At CCOOP Group Co. and HNA Investment Group Co., two other halted units, the declines were 38 percent and 29 percent, respectively, according to a Bloomberg analysis of $1.9 billion in outstanding stock pledges at the three units.


While the suspensions may not keep creditors completely at bay, they tend to help borrowers buy time, according to Chen.


"HNA needs some breathing room,’’ she said. “By halting shares, they not only preempt margin calls that could be triggered by further stock declines, but also deal with the more pressing liquidity crunch.’’


Chinese brokerages and banks that accepted halted shares of HNA units as collateral, including Haitong Securities and China Minsheng Banking Corp., didn’t respond to requests for comment.


There are plenty of reasons to suspect that losses in HNA’s listed units would have deepened had the stocks been allowed to keep trading.


Among developments that emerged after all seven halts had taken effect on Jan. 24: HNA told lenders that it faced a potential liquidity shortfall of at least 15 billion yuan ($2.4 billion) in the first quarter, an HNA unit’s creditor temporarily froze its bank accounts after finding the unit had pledged the same collateral for multiple loans, and S&P Global Ratings cut its assessment on the conglomerate for the second time in less than three months.


Several bonds issued by HNA units have dropped since the stock halts began, as have the Hong Kong-listed shares of HNA-owned CWT International Ltd.


The news hasn’t been all bad for HNA. The group has sold some assets at a profit, and it secured a 20 billion yuan credit line from state-owned China Citic Bank Corp. last month. The Wall Street Journal reported this month that Chinese government officials have told banks to keep lending to HNA.


After clamping down on HNA’s overseas dealmaking last year, authorities may now be trying to stabilize the group, in part by allowing the trading halts, said Veronique Lafon-Vinais, director of Hong Kong University of Science and Technology’s Centre for Asian Financial Markets.


Yet even if that’s true, it’s unlikely to provide much comfort to shareholders who want to reduce their exposure. It means they could be stuck in their positions for a while.


“You can get locked up for a quite a long time,” said Alex Wong, a director of asset management at Ample Capital Ltd. in Hong Kong who doesn’t hold shares in the suspended HNA units. “That is a big concern for investors.”



courtesy of BLOOMBERG

by Blake Schmidt, Pei Yi Mak and Venus Feng


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