Honair shareholder battle ends with HNA regaining undisputed control, says Zhong

Hong Kong Airlines’ (HKA) key shareholders have settled their quarrel, enabling HNA Group to regain undisputed control of the carrier, large shareholder Zhong Guosong told Debtwire.
 
Management of the Hong Kong carrier informally told some credit investors over the past two weeks that it thought a settlement was reached, smoothing the way for ongoing discussions with a potential strategic investor, said two buysiders.
 
The settlement covered both control over the carrier as well as its leading indirect shareholder, Hong Kong Airlines Holdings Co Ltd (HKAH), said Zhong, who had previously been contending that he was HKA’s Chairman.
 
HKA did not reply for comment.
 
As reported, Zhong, who owns a 46.04% stake in HKAH, filed a Hog Kong lawsuit earlier this year contesting the transfer of HKAH shares, which had effectively handed ownership control of the carrier to HNA and its allies. Zhong separately owns an indirect 12.69% stake in Hong Kong Airlines Group, a vehicle that indirectly wholly owns HKA and that is 31.14%-owned by HKAH.
 
With both camps undertaking in court in April to maintain the status quo until a substantive hearing scheduled next month was held, a much-needed share sale at the carrier level was virtually impossible.
 
Zhong has also been contesting publicly HNA’s late-March agreement to sell to Cathay Pacific Airways budget carrier Hong Kong Express Airways, in which he also owns an effective 47.51% stake.
 
Underscoring HKA’s progress in onboarding the potential strategic investor, management said during the recent discussions with credit investors that the counterparty has already provided some funding to the carrier, said one of the buysiders. A person at the company confirmed as much.
 
As reported, HKA management indicated in late June the expectation that a deal with a strategic investor could be announced around July/August.
 
Given its tight liquidity, HKA will need to bring in a well-regarded shareholder to convince its creditors to roll over debt, said the second buysider and another two buysiders. The carrier has been shrinking its operations, including letting pilots go, though its 2018 revenue increased.
 
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During the recent meetings with credit investors, HKA maintained that it believed it had not breached the interest coverage incurrence covenant on its USD 683m, 7.125% perps but that a determination will ultimately need to be made by its auditor, said the first two buysiders. If the 2.25x coverage ratio was indeed breached, the carrier will pay the required 500bps coupon step-up and not launch a covenant waiver solicitation, they said.
 
Management reasoned that while the coverage fell below 2.25x in 2018, that was caused by aircraft leases subsequently novated to HNA flagship Hainan Airlines and thus should not be reflected in the incurrence test, said the first buysider. Other than the aircraft leases, the carrier did not add any new debt other than permitted indebtedness, said the first two sources.
 
Hainan Airlines on 17 June announced that it replaced HKA as the purchaser of two A350-900 planes as well as the borrower for a USD 509m loan China Development Bank provided in relation to the purchase.
 
The perps define the interest coverage ratio as consolidated EBITDA to consolidated interest expense.
 
As reported, PwC resigned as HKA’s auditor and was replaced by Hong Kong firm Li, Tang, Chen & Co in time to enable the carrier to cure within the 30-day grace period its failure to post its 2018 financial report by end June.
 
The perps were indicated at 80-bid this morning, said a dealer.
 
As reported, Hong Kong Airlines International Holdings (HKAIH), the guarantor of the HKA’s USD 683m, 7.125% perps, reported its cash balances fell to HKD 480m (USD 61.6m) as of 31 December 2018, from HKD 538m as of end-June 2018 and HKD 813m as of end-2017.
 
As of end-December, HKAIH had HKD 5.6bn notes payable and HKD 4.7bn borrowings maturing in the subsequent 12 months. The notes payable mainly consisted of USD 550m, 6.9% bond due-20 January 2019, which were redeemed in full on time, as reported. The next major maturity is privately placed USD 138m, 5.5% notes due 1 December.
 
by Terence Wong