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Downstream Holdings of China’s HNA Group Vulnerable After Multi-Billion Dollar Embezzlement Scandal

02/18/21 5 minute read

Chinese aviation investment conglomerate HNA Group is facing bankruptcy proceedings that will result in restructuring for 500 of HNA’s subsidiaries, according to media sources. By combining public records with network analytics, we were able to find more than 5,000 downstream entities within three degrees of separation from HNA Group. In recognition of HNA Group’s aggressive overseas acquisition strategy between 2015 to 2017, our survey of downstream holdings includes cross-border shareholding relationships.

Given what we know so far of the widespread nature of HNA’s credit problems, the group’s likely restructuring and credit repayment obligations have the potential to affect many of the linked entities we identified.

From international acquisition spree to bankruptcy

HNA Group, initially born from the success of state-owned Hainan Airlines, officially ended its era of record setting expansions with the launch of bankruptcy proceedings filed by creditors last month. On the same day, three HNA subsidiaries came forward and publicly disclosed HNA Group shareholders had embezzled nearly $10 billion from the company. Government auditors told the press that 500 of HNA’s subsidiaries are expected to undergo bankruptcy restructuring as well.

During HNA’s heyday, the company aggressively pursued shares in overseas markets, including but not limited to the hotel industry. In 2016 alone, HNA closed deals with 40 companies — two thirds of which were non-Chinese partners — cumulatively valued at approximately $25 billion. By 2019, the group accumulated $76 billion in short and long term debt — eventually leading to intervention from a government working group in February 2020 to assist the company with its liquidity problems.

Over 5,000 entities linked to HNA Group

Today, in spite of its fiscal problems, HNA’s downstream holdings number in the thousands. Using public registration documents, we identified 66 entities HNA has held direct shares in. We included both majority and minority shares in our analysis.

By combining public documents with automated graph technology, we were quickly able to find 945 downstream holdings two degrees of separation away from HNA, and more than 4,000 downstream holdings three degrees of separation away. Cumulatively, this amounted to over 5,000 entities within three degrees of separation from HNA Group that could potentially be impacted by oncoming restructuring. These companies are geographically diverse, including entities registered in Ireland, Brazil, Israel, and the United States, many of which are themselves aviation leasing or investment companies.

As more information comes to light about shareholder embezzlement, we may learn of additional downstream effects from HNA’s activities.

Fig. 1: In one example of downstream relationships, HNA Group (on the far left) is linked to GY Aviation Lease (Malta) (on the far right) with two intermediary entities. This is a relationship within three degrees of separation from HNA Group across four different jurisdictions.

Identifying holdings of financially risky entities

As points of comparison, we used the same methodology and found that successful consumer electronics company Xiaomi — which was recently named by the Department of Defense as a military-affiliated company — cumulatively has 205 downstream holdings within three degrees of separation. Luckin’ Coffee, which itself recently made the news for filing for bankruptcy, has only 11 cumulative downstream holdings in total.

Automated graph technology which combines public records with network analysis is a valuable tool for financial risk managers and investigators. Though groups like HNA have extensive holdings and numerous cross-border relationships, it is still possible to quickly and effectively learn how many companies they are in fact linked to, allowing for more accurate risk assessments of both parent companies and associated subsidiaries.

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