Refinancing Looms for HNA's Hong Kong Projects

By Prudence Ho,

Alfred Liu,

and Annie Lee

/ Bloomberg |

September 18, 2017 10:28 AM SGT

When HNA Group Co., the Chinese conglomerate that’s been buying up companies worldwide, spent $3.5 billion in Hong Kong earlier this year on land for its first luxury real estate development, it had no problems getting bank funding.

But now HNA needs more: to refinance the short-term loans it used for its purchases, which start coming due in November, and then to actually build the towers that will lure high-end buyers and start generating money.

At least four out of eight banks known to have provided a combined $1.5 billion worth of short-term financing for the land purchases to HNA’s units have decided not to renew that credit and don’t intend to extend fresh loans to fund construction costs, according to people with knowledge of the matter who asked not to be identified discussing confidential client relationships. Three of the banks haven’t yet decided and will base their decisions on the terms negotiated, according to people familiar with the discussions.

Photographer: Anthony Kwan/Bloomberg

Land sites under construction at the former Kai Tak airport area

The first repayment deadline HNA faces is in November, when HK$3.5 billion ($448 million) in debt comes due. Two of the three lenders who made those loans have decided not to refinance them, the people said. The rest of the short-term loans on the project are due in January, February and June.

The reasons have to do with scrutiny from Beijing over the transactions of HNA — which has bought stakes in Deutsche Bank AG, Hilton Worldwide Holdings Inc. and numerous others — as well as uncertainty over future property prices, the people said.

Unlike assets HNA has bought globally, the four Hong Kong land parcels that HNA bought at the former Kai Tak airport are greenfield sites. HNA plans in 2019 to start pre-sales for the apartments to be built there, according to filings to the Hong Kong exchange. Estimated costs for construction will total more than HK$10 billion, according to a disclosure to shareholders by HNA’s local property developing unit Hong Kong International Construction Investment Management Group Co.

The unit has "no intention" of turning to HNA’s group company in China for a shareholder loan, it said in the disclosure. Based in Hainan, HNA had cash holdings of about 185 billion yuan ($28 billion) as of June 30, but debt of almost 591 billion yuan. Thus, getting loans from Hong Kong banks or mainland branches in the city is likely to be crucial for construction.

Strong Positions

Representatives for the HNA units involved in the site purchases, HNA Holding International and the group’s 75 percent-owned HKICIM, said planning for the sites, including procuring the design and construction plan, is proceeding smoothly and that the firms have good relationships with banks and strong financial positions.

HKICIM fell 2.6 percent to HK$3.69 on Thursday, tumbling to its lowest close since April 28 in Hong Kong and extending the stock’s decline this year to 28 percent.

Normally developers bidding for a land parcel arrange a short-term loan to pay for it. Then they refinance it and on top of that borrow longer-term construction loans, typically from the same banks, for the projects to be built on the land.

If HNA can’t get bank financing to complete the project, it could be forced to turn to private investors for funding or decide to resell the plots, analysts said.

"HNA might need to give up at least part of it," said Chen Shujin, a Hong Kong-based analyst at Huatai Securities Co.

HNA could also turn to equity and bond markets. HKICIM raised HK$2.32 billion via a rights issue in June and another HK$220 million in a note last month. Last week in Singapore, HNA secured enough financing to go ahead with a planned $1 billion purchase of warehousing-and-delivery company CWT Ltd. after Beijing-based investment bank China International Capital Corp.’s unit in Singapore vouched for it.

Chinese regulators have increased scrutiny of companies such as HNA that were behind last year’s unprecedented spree of global takeovers. China has embarked on a drive to reduce leverage in financial markets and tackle systemic risks ahead of a Communist Party leadership transition later this year, while also curbing capital outflows that have threatened to weaken the nation’s currency. What’s more, property is on Beijing’s list of restricted overseas investments.

"No doubt it would be tougher for acquisitive buyers including HNA to get support from Chinese banks at the moment," said Dickie Wong, executive director of research at Kingston Securities Ltd. in Hong Kong.

Earlier this month, the Hong Kong Monetary Authority was said to have asked banks in the city for details of any loans they had made to HNA. Already in June, following aggressive bidding for land by developers, the city’s de facto central bank started tightening limits on bank loans to property developers for land acquisitions, construction and development.

"If HNA is no longer receiving as much support from the Chinese government as before, they won’t be able to guarantee a strong financial position to repay any new loans," said Huatai Securities’ Chen. “Risks for banks at this stage are still manageable because the existing loans are backed by the land as collateral."

The uncertainties of property prices in next two to three years also may be a factor in banks’ reluctance to lend. HNA bought the land sites in Hong Kong as property prices kept reaching record highs. But some analysts forecast that a multi-year price decline in Hong Kong could start with a drop of 5 percent this year.

Earlier this week, Hong Kong’s Financial Secretary Paul Chan warned potential buyers to be careful buying property in the world’s most expensive housing market. In June, he had said Hong Kong’s property market is in a “dangerous situation” and vulnerable to a correction.

A price drop would squeeze gross margins for developers. For Hong Kong real estate bought in 2011, developers’ returns were 32 percent, according to JPMorgan Chase & Co. Prices have risen considerably since then.

"HNA’s project using land bought this year could probably just have 5 to 10 percent margins when it is completed," said Raymond Cheng, a Hong Kong-based analyst at CIMB Securities Ltd., if costs including land and construction remain high.

— With assistance by Hannah Dormido, and Sven Lan

The story, written by Prudence Ho, Alfred Liu, and Annie Lee, first appeared on Bloomberg.

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