Recently two conglomerate giants the HNA Group and the Founders Group found themselves to be in a deep financial crisis. On April 14, during a creditor’s meeting, the HNA Group’s request for a one-year debt extension was turned down. On February 29, the heavily indebted HNA announced that it has entered into the takeover process and is working with a task team that the Hainan Provincial Government formed during the transition. Meanwhile the Founders Group announced that it will be unable to meet its debit payment and has entered into a bankruptcy procedure. It is currently working with the bank, the department of Education, and other financial institutions on the restructuring process.
According to Sina, both companies were expanding rapidly in recent years through a large numbers of mergers and acquisitions, using capital operations to inflate their assets. The source of the funds was that they were incurring debts from the banks and from strategic investors. The risk to this model was that, as soon as it received the profit from the subsequent investment, it was unable to cover the interest from its previous debt and the company faced a cash flow risk. In 2018, the HNA group started to have cash flow and liquidity issues. Despite the fact that it sold more than 300 billion of its assets in 2018, it was still unable to improve its capital structure. {Editor’s note: According to sources from overseas media, HNA’s expansion could also be partially related to unspecified private cash investments that top party officials in China made in order to transfer their assets overseas.}
Source: Sina, April 15, 2020
https://finance.sina.com.cn/stock/s/2020-04-15/doc-iircuyvh7999067.shtml