Will a troubled HNA be forced to sell its Virgin Australia Holdings investment?

Summary

• HNA is under pressure due to its high debt burden.
• It is considering liquidating assets, including Swissport.
• Its ownership in Virgin Australia is likely to remain intact because it is cash generating, and HNA subsidiary Hainan Airlines has a codeshare agreement with Virgin Australia on the Hong Kong route.

HNA is under pressure and the media are watching closely

Pressured under a heavy debt burden, HNA Group is attracting plenty of media attention. HNA being one of several large Chinese conglomerates under scrutiny, Beijing is starting to question them publicly about their ability to support the repayments that are falling due.

According to a recent article in the Financial Times, the leading firm Goldman Sachs has said the (HNA) group has "strong cash generating assets", but warned over debt and cash flow mismatches among some of the subsidiaries.

And, on 24-Jan-2018, Reuters reported HNA Group was considering an IPO or sale of ground handler Swissport, with the process to be launched potentially as early as 2Q2018, seeking to secure a valuation of at least CNY2.7 billion (USD2.84 billion) for the firm - its 2015 purchase price. This followed S&P's downgrading of Swissport's credit rating on 05-Dec-2017, from 'B+' to 'B', 'outlook stable', due to "significant debt maturities and tightening liquidity" at the investor HNA Group.

In its media release S&P said that while HNA Group continues to access the debt market, its cost of funding had materially increased since 2017. S&P also lowered its long term corporate credit rating on Swissport from 'B' to 'B-', because S&P believes "HNA Group will be less willing to support Swissport in the event of financial stress".

HNA's quite opaque ownership structure makes close analysis difficult, but it is generally recognised that its domestic airline business is profitable - although according to the FT, HNA has "pledged the revenue from some of its air routes to a Chinese trust company".

HNA is a significant owner of Virgin Australia's parent, Virgin Australia Holdings

HNA Group holds a 19% share in Virgin Australia Holdings (VAH), Virgin Australia's parent. Earlier this month it was in a spot of bother with the Australian stock exchange, when challenged over disclosures of relevant interests in its holding.

HNA responded that it had disclosed the "chain of ownership down to the entity directly holding shares". However, some "sister companies of those entities were incorrectly omitted as they do not directly or indirectly have an interest in those shares, but instead are deemed to have a relevant interest under the Corporations Act".

HNA's disclosure to Virgin and the ASX, dated January 2, says it failed to include several relevant parties because of "an oversight".

Despite the recent flurries of news, the market consensus appears to be that HNA will pull through, even if not in its current form. More importantly for Virgin Australia, the more core activities - its airline and tourism businesses - are cash generating and will most likely be protected.

Virgin Australia has applied to extend its codeshare to include New Zealand routes

Aside from HNA's holding in its parent, Virgin Australia also has a "confidential" codeshare agreement with Hainan Airlines on its Hong Kong route, further deepening the relationship - and the cash flow.

And on 16-Jan-2018 Virgin Australia applied to the Australian Air Services Commission to extend the Hainan agreement to cover Virgin's New Zealand services too. (The approval process is pending.)

VAH has other owners too: China's Nanshan Group, along with Singapore Airlines and the currently troubled, but sovereign backed, Etihad. The Virgin Group remains as a 10% shareholder.

This spectrum of ownership offers a decent buffer to any of its owners looking wobbly.

But that does little to make investors feel more comfortable. The tightly held Virgin Australia share price has fallen slightly, by 1%, in early trading on 29-Jan-2018.