Korean Air Faces Credit Downgrade Crisis... Is Early ABS Redemption Imminent?

Hanshin Rating and Hankyung Rating Downgrade Review
Operational Disruption if Collected Cash Used for Repayment

[Asia Economy Reporter Minji Lee] The liquidity management burden of Korean Air has increased due to the impact of the novel coronavirus infection (COVID-19). As the collection performance of airline fare receivables has significantly declined due to the spread of COVID-19, concerns are growing that early payment triggers may be activated. Domestic credit rating agencies have already begun reviewing a downgrade of Korean Air's credit rating, judging that its profit-generating capacity has weakened.

On the 4th, disinfection workers from a quarantine company are disinfecting a Korean Air passenger plane bound for New York at the Korean Air aircraft maintenance hangar at Incheon International Airport. / Photo by Moon Honam munonam@

According to industry sources on the 16th, Korean Air issued 500 billion KRW worth of airline fare receivables (ABS) through Kal J-24th Securitization SPC in September last year, and the collection performance of the trust principal of fare sales provided as excess collateral in February decreased by about 58% compared to the previous month. Although ABS was issued using fare receivables paid by Hyundai Card, Lotte Card, and Nonghyup Bank cards as collateral, the fare collection rate sharply dropped in less than six months. In addition, the collection rates of the underlying assets (fares) of ABS issued by Kal J-29th, Kal J-21st, and Kal J-22nd SPCs, which are due to mature in July next year, also significantly declined.

ABS refers to airlines raising funds by using future airline fares as collateral. Due to the impact of COVID-19, long-term sales of airlines are expected to decrease significantly, causing the excess collateral level affecting the credit rating of ABS to fall below the previous level (more than 5.7 times). The outstanding balance of ABS issuance in the third quarter of last year was about 1.92 trillion KRW, and the amount the company must repay by the third quarter of this year is about 650 billion KRW.

Accordingly, credit rating agencies have expressed concerns that early payment and additional trust triggers may be activated due to ABS credit rating adjustments. Korea Ratings and Korea Investors Service are already reviewing downgrades for unsecured bonds.

If the early payment trigger is activated due to the downgrade of the ABS credit rating, the SPC must use the cash collected daily to repay the maturing securitized bonds, which could lead to operational disruptions as it may be unable to pay fuel costs, wages, and other expenses.

Jikwang Hoon, Senior Researcher of Evaluation Team 3 at Korea Investors Service, explained, "As concerns about ABS operations have increased, the company is proceeding with amendments to existing contract terms. If there is a shortfall in the periodic reserve amounts for principal and interest repayment, it is expected to respond through additional asset trusts or cash deposits."

The industry expects that the shock to the airline industry will not be short-lived. This is based on the judgment that as COVID-19 community infections continue to rise, flight disruptions are occurring on most routes worldwide. Recently, as entry restrictions to Korea have increased, the number of Korean Air flights and passengers in the first week of March sharply dropped by 56% and 73%, respectively, compared to the same period last year.

This content was produced with the assistance of AI translation services.