(September 25): At his peak less than ten years ago, Chen Feng seemed like an unstoppable man on a mission to take over the world.

HNA Group Co, the sprawling conglomerate Chen, and its late partner Wang Jian helped start up as Hainan Airlines in 1993, became the flag bearer of a cabal of companies that collected trophies from the United States to Europe. Their wave of acquisitions symbolized the arrival of China Inc on the world stage. Courted by Wall Street, the globe-trotting mogul has also rubbed shoulders with powerful leaders, including President Xi Jinping and David Cameron, the former British Prime Minister.

Then it all collapsed under one of the biggest mountains of corporate debt in the world. The pandemic sounded the death knell for HNA, which had already struggled to sell assets as its liabilities loomed. Effectively seized in February 2020 by the government of the Chinese island of Hainan, where it is based, the aeronautical and tourism activities of the group have been paralyzed by the closure of travel, and are now being restructured.

Already sidelined when the officials arrived, Chen, 68, is at wit’s end. The president was arrested along with HNA chief executive Tan Xiangdong for unspecified crimes, the company said on Friday, caught in the massive corporate crackdown in Beijing. It also comes as another heavily indebted conglomerate, China Evergrande Group, faces a financial calculation that crosses global markets and raises questions about whether Beijing will step in.

Critical industries

Chen and his group were among the myriad of billionaires and business empires born from decades of China’s liberalization since the death of Mao Zedong. While the state has often dangled favorable policies and used corporations to bolster the country’s presence in critical industries, the Communist Party remains wary of corporate power and its potential threat to financial stability. It is a mistrust that is now playing out in its control of Alibaba Group Holding Ltd, Didi Global Inc and others.

But unlike the tech giants – whose success and control over big data has made it a target – HNA has caught the government’s attention for a different reason. Under the leadership of Chen and Wang, the group took advantage of the easy credit that flooded China in the 1920s to finance a string of acquisitions abroad. Transactions worth more than US $ 40 billion included significant holdings in Deutsche Bank AG and Hilton Worldwide Holdings Inc, luxury properties such as golf courses, iconic hotels on six continents and the skyscraper. 648-foot 245 Park Avenue in Manhattan.

When Beijing realized the risks of such capital flight and leverage, it began to crack down on big buyers. Top-flight insurance group Anbang, owner of the Waldorf Astoria hotel in New York City, was seized by the government in 2018. The slow-motion dismantling of HNA began soon after, with the loss of assets as a result. that debt repayment was looming. The group still faces at least $ 63 billion in claims from its creditors.

“Chen shared the same strategy as many businessmen with political connections – they used their connections to borrow as much money as possible from state-owned financial institutions,” Victor Shih, associate professor specializing in Chinese financial policies and elite politics at the University of California at San Diego, said in an interview before Chen’s arrest. “The way these conglomerates used leverage to quickly overpay foreign assets was unsustainable and resulted in catastrophic deleveraging.”

Debt was the cornerstone of Chen and Wang’s ambitions. Both devout Buddhists, they set their sights on HNA to become one of the top Fortune 500 companies. The credit-fueled expansion helped the conglomerate gain 183 spots to reach 170th by 2017, but also sealed its fate within months as debt skyrocketed to more than US. $ 93 billion the following year.

Born in Shanxi, China’s coal mining hub, Chen grew up in Beijing and graduated from Lufthansa College of Air Transport Management in Germany. He held positions in the Civil Aviation Administration of China and the National Aviation Regulation Bureau before venturing into the private sector. Around 1990, he helped found a company that later became HNA’s flagship company, Hainan Airlines Holding Co., while serving as an aviation business advisor to the Governor of Hainan.

At the start of its growth, HNA managed to secure billionaire George Soros as an investor, which was a coup for a small regional airline with just 10 million yuan ($ 1.5 million) of government support at the time. Chen quickly became the darling of China’s fledgling business community, cultivating a vibrant and approachable image in interviews. He served drinks and snacks on Hainan Air flights, posing for the cameras.

Chen was an “incredibly effective speaker and effective salesperson for HNA and its aspirations,” said William Kirby, a Harvard Business School professor who has known Chen for years and invited him to speak in several of his classes.

Collar Strategy

HNA’s ambitions to go beyond aviation – and to the far reaches of China – began in 2007, when it purchased the SA Sode hotel in Belgium, one of its first assets at the foreigner. Other transactions followed, including the investment in Deutsche Bank AG which made it the major shareholder of the German lender at the time. The stake deployed a popular “collar” strategy with Chinese leveraged buyers and saw HNA hold most of its stake through derivative contracts called put options.

Chen was not fazed by the accumulation of debt. In an interview with state-run China Central Television in 2004, he compared leverage to lice. When you have that much, “you don’t feel itchy anymore. When you’ve borrowed so much, you can fall asleep at night.

The conglomerate’s financial woes began to emerge in mid-2017. HNA, Anbang and others began to sell off their assets, canceling some of their larger purchases to pay off debt. Although people familiar with the talks in 2018 said that China’s top leaders agreed to help HNA raise funds, providing a safety net, it did not materialize.

Too fast

“HNA was growing faster than management expertise,” said Warut Promboon, managing partner of Hong Kong-based credit research firm Bondcritic Ltd. “The government used HNA to expand China’s influence, but that had to go hand in hand with the health of the company.

The turmoil worsened in July 2018, when Wang passed away while on vacation in southern France. He was 57 years old. Local police said the HNA co-chair fell from a height of 15 meters (49 feet) while having his picture taken in the village of Bonnieux. Months later, the French daily Liberation reported that the incident was suicide.

Wang’s death provided an additional layer of intrigue around HNA, which faced a growing number of questions over its ownership structure and alleged financial ties to Communist Party leaders. The perceived connection to power gave some bond investors a sense of security that Beijing would come to HNA’s rescue if it ever got into trouble with its debt.

Soon these investors would find their optimism misplaced. Since the authorities took over the HNA and engaged it in restructuring, allegations of financial mismanagement under the original regime have surfaced.

In exchange documents in February, three HNA units alleged that some shareholders and affiliates had embezzled at least 63 billion yuan ($ 9.7 billion) in funds and that they had not disclosed about 46 billion yuan of debt guarantees. On Saturday, the day after Chen’s arrest was revealed, Chinese magazine Caixin reported that numerous related party transactions, including some related to HNA’s overseas acquisitions, had not been fully disclosed to regulators. .

A review of company records and interviews with several executives, past and present, revealed that Chen, along with Wang and several senior executives, owned companies controlled or invested by family members who did business with HNA. , said Caixin. The complex web of related party transactions meant that HNA could have paid up to 50% more than its competitors for aircraft equipment and 10% more for aircraft, said a former HNA executive who did not been identified, cited by Caixin.

HNA representatives declined to comment.

Sitting buddha

With Chen now in custody with Tan – a US citizen, according to documents filed with the Securities and Exchange Commission – HNA is firmly in the hands of the government. Its Hainan head office, famously shaped in the form of a sitting Buddha by local media, is now crowded with officials, who negotiated the sale of stakes in its airline and airport operations earlier this month and plan to restructure the business. group into four independent companies. units.

While his son Chen Xiaofeng remains on the board, Elder Chen’s detention separates him from HNA. His treatment is similar to that of former Anbang president Wu Xiaohui, who was sentenced to 18 years in prison in 2018 for fraud and embezzlement.

More heavily indebted companies could meet the fate of HNA, Bondcritic’s Warut said.

“Without an explicit guarantee, we should not have expected the government to bail out the company,” he said. HNA “sets the priority that companies can undergo restructuring, so investors know these things could happen to many companies in China.”