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by Tyler Durden
Dec 27, 2017 6:17 AM
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SHARES
The notoriously acquisitive Chinese conglomerate HNA - which recently had a sharp falling out with Beijing
resulting in a margin call "shocksave" - is facing a serious cash crunch in 2018 as nearly a quarter of its $100
billion in debt – a large chunk of which was accumulated during a multi-year buying spree that saw it become a
major shareholder in Deutsche Bank, Hilton Worldwide and a large portfolio of international holdings - comes
due.
But even as the company resorted to loaning out shares and entering into arcane derivative financing agreements
to finance its debt-service payments, it is quickly finding that traditional avenues of financing are disappearing or
becoming too costly.
Despite being one of China’s largest conglomerates, HNA has been shut out of stock and bond markets as
lenders worry about its outsized debt load, forcing the company to pledge some of its core holdings as collateral
for short-term loans, as the Wall Street Journal reported earlier this month.
This has forced the conglomerate to explore other options. To wit, the bank recently pledged some of its
Deutsche Bank shares to UBS as collateral for a loan worth roughly $117. It also executed an options strategy
known as a collar. This strategy involves purchasing out-of-the-money puts to protect against a large drop in the
stock while simultaneously selling out-of-the money calls to offset the cost of the puts.
On Dec. 20, HNA’s unit entered into a new series of collar transactions with Swiss bank UBS Group AG, and
pledged its Deutsche Bank shares to UBS in exchange for a total of 2.36 billion euros (US$2.8 billion)
in net financing. It also has a margin loan from UBS and ICBC Standard Chartered PLC. In all, the new total
amount of financing was about 99 million euros (US$117.6 million) higher than what was disclosed in
a similar filing in May.
The additional collar financing disclosed this week should help protect HNA’s position in Deutsche Bank
shares from margin calls in the future, according to people close to the companies. The new collar
financing extends to 2020, longer than before, and gives HNA additional protection against volatility
in Deutsche Bank shares, they said.
With memories of last fall’s dramatic plunge in Deutsche Bank shares still fresh – a selloff that was triggered by
the DOJ’s decision to slap the already shaky German lender with a $14 billion fine – HNA assured its fellow
shareholders that it is a “long-term investor” in Germany’s largest bank. The comment is, of course, self-
serving: Though it has purchased downside protection to protect against a large drop in DB’s shares, a
substantial decline in the company’s valuation could be the straw that pushes the conglomerate into
bankruptcy, and potentially triggers China’s "Minsky moment."
For context, HNA owns about $4 billion in DB shares, roughly equivalent to a 10% stake, as shown in the
Bloomberg chart below and according to Reuters.
http://www.zerohedge.com/news/2017-12-27/stave-panic-hna-assures-fellow-deutsche-investors-its-long-term-investor 1/10
12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
Concerns about HNA’s financial position intensified since it issued a bond last year with less than one year to
maturity. The bond carried the extortionately high coupon of 9%, prompting us to wonder if the demise of one of
China’s “Big Four” conglomerates might be rapidly approaching.
HNA has borrowed $40 billion since 2015 to finance its world-wide buying spree. But in some cases, it’s
already getting buyers remorse. About a month ago, its chief executive acknowledged a shift in strategy, saying
HNA was looking to sell assets it deemed noncore. For example, it is exploring a group of foreign commercial
properties it owns.
As reported by Reuters, Alexander Schuetz, HNA’s representative on DB’s board, made the comments during an
interview with German newspaper Handelsblatt. The comments were later picked up by Reuters and Bloomberg.
Schultz specifically emphasized that HNA has “no interest in a sale” of its DB holdings.
Schuetz sought to dismiss any lingering speculation that HNA would sell its stake in the German lender,
which is just under 10 percent and valued at around 3.3 billion euros ($3.9 billion). “We want to show that
this is totally wrong,” he was quoted as saying.
HNA’s $50 billion worth of deal-making over the past two years has sparked intense scrutiny of its opaque
ownership and use of leverage.
In the interview, Schuetz pointed to a new financing structure with derivatives - with a three-year maturity -
that insure against a drop in the bank’s share price. “This shows that HNA is focused on the long-term
and has no interest in a sale,” Schuetz said.
Late last month, S&P downgraded HNA’s credit rating by one notch from B+ to B, five notches below investment
grade as a result of its “aggressive financial policy” and tightening liquidity amid looming debt maturities. Even
before that, some of the conglomerate’s largest subsidiaries were issuing bonds with interest rates far higher
than their credit ratings would seem to suggest.
To be sure, despite its reassurances, if HNA is still struggling to raise the capital needed to make its $28 billion
debt-service payment at the end of June, it’s likely even core assets might be put on the chopping block.
http://www.zerohedge.com/news/2017-12-27/stave-panic-hna-assures-fellow-deutsche-investors-its-long-term-investor 2/10
12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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Reading through the detail, it was not clear to me if DB has a final settlement with the American DOJ?
The linked article suggested that it might drop from a $14B fine to something closer to $5B. That
would have a material effect on the current DB share price that should be positive.
So we reach an interesting juncture on the road to peak debt; we have a German bank that might
trigger a Chinese Minsky moment, because of a very large fine from the DOJ that was in response to a
back-tax bill on an American Corporate by the EU.
I've read that the Chinese has been net sellers of US Treasury Bonds for a while. It would be ironic if
both the US and Chinese debt bubbles burst because of the lending actions of a German bank in
http://www.zerohedge.com/news/2017-12-27/stave-panic-hna-assures-fellow-deutsche-investors-its-long-term-investor 3/10
12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
g
America.
Anyone know what the current situation for DB is with the DOJ fine?
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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12/27/2017 To Avoid Liquidation Panic, HNA Assures Deutsche Shareholders It's A "Long-Term Investor" | Zero Hedge
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