Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Aircraft leasing is a pretty straightforward business.

Any company that can borrow at a lower rate than an airline and keep its planes leased out rather than parked in a desert boneyard stands a decent chance of making money. If it can borrow more cheaply than rival aircraft lessors, it's really onto something.

That makes leasing an obvious business for HNA Group. The Chinese conglomerate rarely lets a month go by without buying one aviation asset or other, so it's no surprise to see it paying $10 billion for CIT Commercial Air, the aircraft-leasing unit of U.S. financing group CIT.

Spending Spree
HNA Group has announced about $32 billion worth of deals since July 2015
Source: Bloomberg data, news reports
Note: HNA hasn't made a takeover offer for Rezidor, but is obliged to do so within four weeks of closing its takeover of Rezidor's closely held majority owner Carlson Hotels unless it sells Carlson's 51% stake in Rezidor down below 30%. Rezidor could fetch about $2 billion in a sale, people familiar with the matter told Bloomberg.

The deal, once combined with HNA's $7.6 billion acquisition of Avolon earlier this year, will deliver the conglomerate the biggest leasing fleet globally after General Electric's GECAS unit and AerCap -- a nice way to top off the $32 billion-odd of purchases the group has made since last July.

New Kid on the Block
HNA has come from nowhere to be one of the world's biggest aircraft lessors.
Source: Airfinance Journal, Company websites
Note: BBAM, Air Lease, and Aviation capital numbers are for owned and managed fleet. All others are for owned, managed, and committed orders. Figures are latest available. HNA figures assume the completion of the CIT acquisition.

If you're wondering how a Chinese regional airline managed to become one of the world's most acquisitive companies within a couple of decades of its founding, there's a simple answer: free money. Right now, HNA appears to be able to borrow more cheaply than the U.S. government.

Take a look, for instance, at the bond prospectus for its 6.2 percent perpetual notes issued in August. HNA's 247 million yuan ($37 million) of cash interest payments in the year through December was equivalent to less than 0.1 percent of its 264 billion yuan in average debt. That's actually marginally down on the rate it paid in prior years, despite a rising share of bonds in its borrowing mix that are priced at something approaching market rates.

Free money has some definite advantages. Finance costs, after all, are one of the main factors on which lessors compete. Bohai Financial, the HNA affiliate that's the vehicle for the CIT deal, does appear to pay a rather higher rate on its borrowings than the mothership -- but it's still low enough to provide deadly competition to established lessors.

Cheap at the Price
Estimated interest rate on average borrowings at major aircraft leasing companies
Source: Bloomberg, company reports
Note: Based on annual cash interest payments as a proportion of average total debt.

As the parable of King Midas demonstrated, a limitless supply of wealth can have its disadvantages, too. Freed from the mundane need to justify acquisitions to penny-pinching financial officers, companies risk overpaying for deals.

As CIT's Chairwoman Ellen Alemany pointed out in an investor call after Thursday night's announcement, aircraft lessors are mostly trading at a discount to book value. HNA paid 1.2 times book -- a bigger premium even than the one attached to BOC Aviation, the state-backed Chinese lessor listed on Hong Kong's exchange in June.

Too much free money also risks spreading complacency about what ought to be its main business -- that making-money thing. By its own statements, HNA hasn't garnered a return of more than 1 percent on its assets in any of the past four years. Its interest coverage has tended to hover around the 1.5 times ratio at which alarm bells ought to start ringing.

Stick It on the Credit Card
HNA Group has more debt than Kraft Heinz, but its operating income is smaller than Lindt's
Source: Bloomberg, company reports
Note: HNA figures are for the year ended Dec. 31, 2015. All other net debt figures are latest filing; operating incomes are trailing 12-month.

So long as its creditors' checkbooks remain open, HNA can continue on its golden spree. Should they ever close, things will start looking very tight.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net