Korean Air Shaken by COVID-19, Raises 50 Billion Won in Capital Market

500 Billion KRW Securitization Loan Led by Korea Investment & Securities
Concerns Over Credit Rating Downgrade of Corporate Bonds and ABS Due to Sharp Sales Decline
Increased Burden of Debt Repayment

[Asia Economy Reporter Lim Jeong-su] Korean Air, which has entered emergency management due to the novel coronavirus infection (COVID-19) crisis, has raised 50 billion KRW in capital markets. It is known that liquidity was secured to repay maturing borrowings. As credit ratings have become precarious due to deteriorating performance and financial conditions, it is expected that responding to future loan maturities will not be easy.

According to the investment banking (IB) industry on the 16th, Korean Air received a loan worth 50 billion KRW from a special purpose company (SPC) established under the management of Korea Investment & Securities. The maturity is two years. Korea Investment & Securities issued asset-backed securities based on the principal and interest of the loan it lent to Korean Air to raise loan funds. When Korean Air repays the principal and interest to the SPC, the funds are used to repay the principal and interest of the asset-backed securities.

An IB industry official said, "It will be used to repay maturing borrowings, such as the yen bonds maturing in February." It is understood that Korean Air repaid yen bonds worth 5.1 billion yen (about 55 billion KRW) that matured in late February. Although the yen bonds matured, no new foreign currency-denominated bonds were issued.

The problem lies with borrowings maturing in the future. Immediately, corporate bonds worth 240 billion KRW will mature in April. To repay this, a public corporate bond worth 160 billion KRW was issued in February. Corporate bonds worth 185 billion KRW and 70 billion KRW are scheduled to mature in August and November, respectively.

Including these, as of the end of September last year, borrowings and long-term liquidity liabilities that must be repaid or refinanced within one year approach 4.35 trillion KRW. General financial borrowings excluding aircraft lease fees amount to about 2.6 trillion KRW.

Abnormal signs are also detected in asset-backed securities (ABS), which have been used as a major funding source. Due to the sharp decline in sales caused by the COVID-19 crisis, the freight receivables provided as excess collateral for ABS principal and interest repayment are rapidly decreasing.

If the freight receivables provided as collateral for ABS fall below an appropriate level, Korean Air will have to respond with suspension of provisional payments, cash deposits, or additional asset trusts. Also, when issuing new ABS, investors require relatively more freight receivables as collateral, making it difficult to significantly increase ABS issuance.

Moreover, if the credit rating falls further, issuing corporate bonds and ABS, which have been major funding sources, will become difficult. Credit rating agencies warned, "Not only the existing corporate bond credit ratings but also the ABS credit ratings, which have been rated one notch higher than corporate bonds, could be lowered by one notch or more."

An IB industry official said, "Although excess collateral for ABS is still maintained despite the sharp decline in sales, so triggers such as additional collateral demands are unlikely to occur," he added, "If the credit rating falls, raising funds to respond to loan maturities will not be easy."

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