By Anjani Trivedi and Julie Steinberg 

In the summer of 2016, Adam Tan, chief executive of China's HNA Group Co., told an adviser he thought the conglomerate was growing too quickly. After an acquisition tear that vaulted HNA into the top tier of global buyers, it needed to digest its new holdings, he said, according to a person familiar with the conversation.

Mr. Tan didn't take his own advice and today HNA is paying the price. Instead of retrenching, he accelerated HNA's shopping, including investments in Deutsche Bank AG, the Hilton hotel chain and SkyBridge Capital, the investment firm of the onetime White House communications chief Anthony Scaramucci. Between early 2015 and October, HNA had announced over 80 deals totaling more than $40 billion.

HNA's ascent and ambition -- it has sought comparisons to Warren Buffett's Berkshire Hathaway, people familiar with the company say -- is now drawing the scrutiny of regulators and Wall Street, and the conglomerate's expansion has hit a wall.

Some U.S. banks have scaled back dealings with HNA, citing its complex ownership structure, people familiar with the deliberations said. And HNA has faced sharply higher borrowing costs in recent weeks.

Mr. Tan, 50, has been jetting around the world to persuade lenders and companies to keep working with HNA, said people familiar with his efforts. In one of a series of statements to The Wall Street Journal from Mr. Tan and HNA, the company said it signaled earlier this year that its investment pace was likely "to moderate somewhat this year relative to 2016," and that HNA would "continue to take a disciplined approach to actively identifying, evaluating and pursuing strategic acquisitions."

HNA and big Chinese conglomerates like it have become a question mark in the world of global finance. They electrified the investment world with a mergers-and-acquisitions bonanza. Encouraged by Beijing to ascend the global stage, Chinese firms announced $220 billion of foreign acquisitions last year.

Now, they have heavy debt and are sparking fears they could pose a systemic risk to China's economy -- as well as uncertainty over the future of cross-border investment. Anbang Insurance Group Co., which made aggressive global bids, is among the companies that have faced regulatory review of their debt and was eventually forced by Chinese regulators to slow its growth. Anbang declined to comment.

Dalian Wanda, which bought AMC Entertainment Holdings Inc., has unloaded assets to pay down debt and dropped plans to buy Dick Clark Productions Inc. It declined to comment.

Cross-border deals announced by Chinese companies into the U.S. in 2017 were down about 80% as of October from the same period a year earlier, according to data provider Dealogic, to $12.4 billion.

The worry is that conglomerates, by pulling back, could slow the global-acquisitions trend and affect markets. "There is the risk of financial damage, but also public embarrassment if there is a big Chinese company that could go bankrupt," said Thilo Hanemann, a director at the New York consultancy Rhodium Group leading its work on global trade and investment. "Plus of course, contagion risk," he said -- the risk that financing troubles at a Chinese company that has borrowed around the world could have global ripple effects.

Already, some credit-rating firms, such as Standard & Poor's, have expressed wariness about HNA's impact on acquired companies, whose cash flows the Chinese acquirer tends to tap.

On Nov. 3, Chinese regulators again tightened rules on outbound investment, requiring that companies investing in certain sensitive areas seek approval if the deals are done through an offshore subsidiary. HNA and other conglomerates often do deals through such entities.

Uncertainty surrounding HNA is compounded by the opacity of its ownership and corporate structure -- a web of subsidiaries that makes it hard to figure out who controls what and who is ultimately liable if difficulties arise.

There are no outward signs HNA's businesses are in dire straits. HNA's assets were 1.21 trillion yuan (about $178 billion) as of June 30, according to filings, up from 1.02 trillion yuan at the end of 2016. Its revenues in the first half of 2017 were 272 billion yuan, up 92% from the previous six months.

But its net income fell nearly 10% to 812.5 million yuan in the same period, and HNA has estimated the group has more than $100 billion in total debt, saying it is taking steps to limit risk.

As lenders have become less willing to fund HNA in recent months, its cash situation has tightened, according to a person familiar with HNA. Executives told people inside and outside the company that it was in "wait-and-see mode" on major new deals until China's gathering of Communist Party leaders in October, but HNA's deal-making pace hasn't resumed. Earlier this month [NOV], a unit of the company had to pay 8.875% in interest to borrow $300 million for less than a year, compared with similar bonds issued by a junk-rated Chinese property developer at 5.5%.

Some HNA employees involved in finding deals have left due to the pause in deal flow, said some of the people familiar with HNA. Mr. Tan has told others in recent weeks he has fresh doubts whether the SkyBridge deal will close, said people familiar with the discussions.

Buying bonanza

During China's buying bonanza, HNA was among its biggest acquirers, doing more than a quarter of the $65 billion in announced Chinese deals into the U.S. in 2016, according to Dealogic. It has 45,000 employees in the U.S.

It started as a regional airline, founded by Chen Feng and Wang Jian, former employees of China's Civil Aviation Administration, HNA documents show. Mr. Tan, a principal architect of its expansion, joined in the early 1990s as an assistant to Mr. Chen, according to filings.

Mr. Tan, with an M.B.A. from St. John's University and a Harvard executive-education diploma, said he admires America's entrepreneurial spirit, strong legal system and free-market devotion. "We at HNA share those core values," he said.

To accelerate growth, HNA acquired stakes in aviation companies from France to Africa. It bought airports and hotels and expanded into logistics, transportation, insurance, futures brokerage, cloud computing, bulk commodity trading and oil storage.

It spent $140 million on Seattle golf courses and invested $336 million in San Francisco-based RocketSpace Inc., which helped launch Uber Technologies Inc. and Spotify AB. It spent nearly $80 million on a Manhattan townhouse.

As HNA's deal-making expanded in 2016, internal tensions were building, said people close to the company. Mr. Chen, co-founder and co-chairman, wanted HNA to remain focused on aviation, logistics and tourism, they said. Mr. Wang, long Mr. Chen's second-in-command and now co-chairman, wanted HNA to act more like an investment firm acquiring stakes across sectors, some of these people said.

Mr. Tan sided with Mr. Wang, some of the people said. HNA declined to make Messrs. Chen and Wang available for comment. "HNA Group's senior leadership team is unified behind its corporate strategy of building a world-class company," an HNA spokesman said.

Deal-making intensified, including HNA's $6.5 billion acquisition of a 25% Hilton Worldwide Holdings Inc. stake in October 2016 and a $4 billion acquisition of CIT Group Inc.'s aircraft-leasing business that month.

Instead of targeting profitable companies, HNA sought assets with considerable revenues that would hasten its rise up the Fortune 500, said people familiar with HNA's strategy, with Mr. Tan encouraging its subsidiaries to acquire stakes in other companies. HNA eyed target companies' assets it could use as collateral to back further purchases, one of the people said.

This strategy can be perilous, bankers and analysts said, because if the value of the assets backing these transactions drops, the investments and loans dependent on it can be put in jeopardy.

HNA increasingly deployed complex financing strategies more common among hedge funds and private-equity firms than traditional conglomerates looking for long-term investments. In the Deutsche Bank investment, it relied on more than $2.8 billion in loans and a series of complex derivative transactions, filings show.

For the Hilton deal, HNA used margin loans -- borrowing against stockholdings, sometimes in the target company -- to cover $3 billion of the cost, according to regulatory filings. Such tactics can be risky because if the assets fall in value, banks can force buyers to supply additional funds quickly.

Mr. Tan said HNA's stake has "appreciated significantly since our initial investment."

Other investments have come at a premium, including land HNA bought at Hong Kong's old Kai Tak airport at 88% above market valuation starting late last year -- financed through bank loans and interest-free unsecured loans from other parts of the company, according to a regulatory filing.

After HNA spent $2.8 billion for Swissport International Ltd., the Zurich cargo handler found itself in breach of debt covenants with lenders because an HNA subsidiary had pledged its shares toward a loan. After addressing the default, HNA is reviewing options for the company, people familiar with the episode said.

HNA executives, defending its debt-heavy deal-making, said HNA tries to be a smart investor and is taking steps to limit risk.

Ownership questions

Then there is the mystery over HNA's ownership and structure. Some banks, already seeking clarity about its ownership, were further rattled after Beijing's move to review the financial health of large deal makers became public in June, people familiar with the banks said.

An exiled Chinese real-estate tycoon, Guo Wengui, has publicly alleged that HNA's shareholders may include individuals connected with Communist Party leaders -- potentially a sign of corruption or favoritism, he has said. HNA denies shareholders include people connected to party leaders. It filed a lawsuit in New York state court alleging Mr. Guo has made "repeatedly false and defamatory statements." At the time, in response Mr. Guo said he welcomed a legal battle with HNA.

HNA revealed more ownership details in July, naming for the first time all its ultimate beneficial owners, including a New York foundation with a nearly 30% stake as its single largest shareholder. Mr. Tan owns 2.95% of the group.

The disclosure didn't explain who HNA's shareholders had been as it was buying assets across the world, what the value of the HNA shares were and how they were transferred among HNA's stakeholders. There are also questions about the role of the charity, less than a year old.

HNA said it realizes there is increasing interest in its ownership and corporate structure because of its fast global growth and will "continue to increase transparency on these matters accordingly."

Goldman Sachs Group Inc. suspended work on an initial public offering of an HNA unit, and Bank of America Corp. pulled out altogether, both citing concerns over HNA ownership, people familiar with the IPO effort said. The IPO is on hold, said one of the people.

HNA Group said "we strongly contest" reports global banks have stopped working with it. Mr. Tan has sought guidance from Western executives on addressing the pressure, said people familiar with the conversations. During a July meeting with Carlos Hernandez, J.P. Morgan Chase & Co.'s head of global banking, Mr. Hernandez told Mr. Tan HNA is "playing in the big leagues, like the NFL," and should expect more scrutiny, said a person familiar with the discussion.

HNA has been meeting with banks including J.P. Morgan and Goldman and answering questions about ownership, people familiar with the discussions said. One of these people said answers received so far had been unsatisfactory. Another said HNA has been forthcoming with materials but not all questions had been answered yet.

A key concern is whether HNA can afford to hold its empire intact as its borrowing costs rise, according to investors, analysts and credit raters. In HNA's half-year results released in August, financing costs more than doubled as borrowing rose sharply.

In a continuing bid to acquire Hong Kong-listed asset manager Value Partners Group Ltd., HNA in April tried to finance the deal at an interest rate of 8% to 9%, said a person familiar with the bid. But the potential lender believed the rate should be closer to 15%, given HNA's rising debt, the person said. The deal hasn't closed, according to filings.

HNA declined to comment on what it called "market rumors and speculation."

This month, an HNA unit said in a filing it would sell and repurchase 4 million shares -- a form of short-term borrowing -- of NH Hotel Group SA to "provide liquidity to HNA globally."

HNA has turned to more expensive private lenders such as hedge funds. Over the past year, its subsidiaries have raised nonpublic equity -- privately selling shares to investors instead of on a public exchange -- by issuing at least 30 billion yuan ($5.5 billion) to repay liabilities and bolster capital, filings show.

HNA executives have continued hobnobbing with celebrities such as former French President Nicolas Sarkozy and Mr. Tan was photographed with Vice President Mike Pence this summer.

HNA in June published a series of videos titled "Said by Adam Tan," in which the CEO promotes HNA's philanthropy and says it aims to be among the world's 10 largest companies.

"Our way is we are smart," he says in a video. "We are disciplined."

--Jenny Strasburg contributed to this article.

Write to Anjani Trivedi at anjani.trivedi@wsj.com and Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

November 19, 2017 14:32 ET (19:32 GMT)

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