- Recently the HNA Group, which is headquartered in the Cayman Islands, has revealed unusual cash movements in its previous and current accounts.
- As of the end of June 2019, HNA Group's total liabilities were approximately RMB 700 billion
- The HNA Group entered into a management agreement with Bank of America last month in an attempt to reduce liquidity.
Recently the HNA Group, which is headquartered in the Cayman Islands, has revealed unusual cash movements in its previous and current accounts. The company made three bankruptcy petition filings by its creditors on behalf of its debtors. There also may be an investigation into whether any of the transactions were improper or incomplete.
HNA Group issued a statement on January 29, stating that it received a notice from the Hainan Higher Court on the same day that the relevant creditors applied for the court to reorganize HNA Group. As of the end of June 2019, HNA Group’s total liabilities were approximately RMB 700 billion.
That raises questions as to how accurate the company’s internal records are and whether it used “hiding” accounts to manipulate accounting practices.
The HNA Group entered into a management agreement with Bank of America last month in an attempt to reduce liquidity. That meant that the bank would receive less money than expected in return for all of its assets, including its accounts receivable and inventory.
At the time this management agreement was announced, Bank of America was in the midst of trying to restructure and reduce its financial risk relating to the way it does business.
In that effort, the bank had concluded that many of its commercial mortgage units were worth less to borrow than they were worth on the balance sheet.
The HNA Group entered into a management agreement with Bank of America through its wholly owned subsidiary, RCBC China Limited. In that agreement, RCBC committed to buy all of Bank of America’s Accounts Receivable. It did not own the receivables directly but instead had a contract for “asset-based capital financing.”
This means that the HNA would have complete control over the sale of Accounts Receivable but would only receive cash payments based upon the amount of equity it controlled in each account. In other words, if the equity decreased for Bank of America, then RCBC would purchase less equity in the accounts receivable contract.
What makes all of this problematic is that when banks sell their receivables, they often pay the full face value, which means the newly acquired debts owed by the Group are often paid less than the face value. In the case of HNA, its subsidiary, RCBC China Limited, received an option to purchase all of Bank of America’s Accounts Receivable at a discount of forty percent.
By exercising that option and assuming the loss prevention commitment in the U.S., it could raise the cash flow and operating funds of the Group. That is the crux of the conflict between the hedge funds and RCBC and why HNA had to pay so much in cash to acquire Bank of America’s debts owed to HNA Group.
While HNA was purchasing Bank of America’s debts owed to HNA Group, it also received cash from two separate yet related funding sources. One source came from Bank of America itself by way of a cash advance note commitment.
According to a Bank of America spokesperson this specific transaction was reviewed under the appropriate guidelines by Bank of America’s risk management groups and was deemed to be appropriate.
The second funding source related to the sale of an existing cash advance note portfolio to HNA Group. Again, according to a Bank of America spokesperson, “These transactions were reviewed as underwriters would not be interested in financing this type of note if it did not have the potential for revenue.”
As a result of these new developments, HNA Group has restructured its business model. For the most part, all of its debt collection activities now will come from a single point in New York, which is the home of the Group. The new address for HNA’s debt collection activities now is 35 Madison Avenue, Suite 6200, New York, NY.
A representative for HNA has indicated that the restructuring will continue until the company can find a suitable new venue for its debt collection activities in China. It should be noted that despite Bank of America’s attempts to contact HNA Group, no new agreement has been signed and no new loans have been authorized.
The recent turn of events for HNA comes as Chinese law firms are aggressively expanding their presence on the New York Stock Exchange.
According to Businessweek, a leading business publication, “Chinese banks are aggressively seeking outside expertise to improve their overall debt collection practices,” with many of the transactions coming from lawyers and law groups representing HNA Group.
China Law Business magazine reported in January that the number of debt collection firms with Chinese connections has increased by over 50 percent during the past year.
The magazine goes on to say that some of these firms “are using unorthodox methods such as using hired debtors or sending fake letters” to pressure financial organizations into settling debts.
Clearly, the relationships between HNA Group and Bank of America are complex and not fully understood. However, given the current climate in China for businesses wishing to do business there, it is unlikely that HNA’s business model will encounter any kind of backlash from the Chinese government.
For all intents and purposes, HNA’s relationship with Bank of America is a strategic and important one. Whether or not that relationship will impact HNA’s growth in China is something that remains to be seen.