Korean Air, Will 600 Billion ABS Ease Liquidity Constraints?

[Asia Economy Reporter Lim Jeong-su] Korean Air will secure liquidity of 600 billion KRW by issuing aircraft fare asset-backed securities (ABS). If the funding is successful, it will provide relief in a situation where securing funds has become urgent due to the novel coronavirus infection (COVID-19). Although the financial authorities requested corrections to the securities registration statement submitted by Korean Air, the possibility of successful funding is expected to be high as a financial company to underwrite the ABS has been decided.

According to the investment banking (IB) industry on the 20th, Korean Air is proceeding with related procedures to issue ABS worth 600 billion KRW. Domestic and international flight fares sold through BC Card were provided as collateral (underlying assets). When the aircraft fare payment funds flow into the trust, the principal and interest of the ABS are repaid first with the corresponding funds.

KDB Industrial Bank, Mirae Asset Daewoo, NH Investment & Securities, Korea Investment & Securities, KB Securities, Kiwoom Securities, and Yuanta Securities acted as lead managers. These financial companies will fully underwrite the ABS issued by Korean Air and then sell them to institutional investors.

The Financial Supervisory Service requested corrections to the ABS securities registration statement submitted by Korean Air, delaying the original schedule for ABS issuance. However, since the financial company to underwrite the ABS has been decided, the prevailing view is that there will be no difficulty in securing liquidity.

An IB industry official said, "We expect Korean Air's fare revenue to recover in the long term," adding, "Even if Korean Air faces difficulties, the excess collateral level of the ABS is high, so there will be no disruption in fund recovery."

Korean Air has faced an emergency in funding for debt repayment and securing operating funds due to the COVID-19 crisis. This is because the possibility of further downgrades in credit ratings for ABS, which is almost the only funding method, has increased.

Credit rating agencies recently placed Korean Air's (BBB+) credit rating outlook under review for downgrade. This action was taken due to the significant impact on sales and profits caused by the spread of COVID-19 and the expectation that the decline in travelers may be prolonged. The ABS rating, which is higher than the corporate bond credit rating, was also placed under review for downgrade. If the credit rating actually falls, Korean Air's funding capability could sharply deteriorate.

An industry official said, "If sales drop sharply, early payment triggers may occur in previously issued ABS," but added, "If the ABS issuance succeeds, Korean Air's liquidity concerns will be somewhat alleviated."

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