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HNA Unit Avolon Strengthens Creditor Protections Against Parent

Avolon Holdings Ltd., an Irish unit of Chinese conglomerate HNA Group Co., has moved to protect its bondholders against propping up its cash-strapped parent.

The aircraft lessor added new covenants to existing senior unsecured bonds limiting loans it can make to Bohai Capital, another HNA unit, according to an earnings presentation on Thursday. Under the new terms, Avalon must redeem its bonds if it exceeds indebtedness limits or sends too much money to Bohai through dividends or loans.

“It places explicit limitations on Bohai’s ability to extract capital from Avolon” and “formalizes the segregation of Avolon’s financial resources from Bohai Capital and HNA,” Fitch Ratings analysts Sean Pattap and Johann Juan wrote in a report on Thursday.

The move represents a reversal of Avolon’s stance as recently as December, when Chief Financial Officer Andy Cronin told investors that the company could raise funding without strengthening covenants. Analysts at Fitch Ratings and CreditSights warned at the time that bondholders had no protections against HNA using its subsidiaries as piggy banks.

HNA Units’ Bondholders Lack Protection From Parent’s Woes

The new guarantee will be suspended if Avolon achieves two investment-grade credit ratings or if HNA ceases to be the majority owner, the company said on Thursday. Fitch and Moody’s Investors Service affirmed Avolon’s ratings at BB and Ba2, two levels below investment grade.

HNA is under regulatory scrutiny following a debt-fueled $40 billion global acquisition spree that made it the biggest shareholder of companies including Hilton Worldwide Holdings Inc. and Deutsche Bank AG. The group told creditors last month that it could have a liquidity shortfall of at least 15 billion yuan ($2.4 billion) this quarter and that it’s targeting about 100 billion yuan in asset sales during the first half of the year.

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