Airline ABS Bomb Ticking... Banks Losing Trillions on High Alert (Comprehensive)

IBK, Credit Line for 320 Billion KRW Asiana ABS Amid Credit Rating Downgrade
Shinhan Bank's 430 Billion KRW Credit Line for Korean Air Foreign Currency ABS Reaches Early Repayment Trigger... Kookmin and NongHyup Banks Also Burdened
Banking Sector Tense Over Potential Debt from Early Repayment Pressure on Airline ABS

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Haeyoung] Asset-backed securities (ABS), a means by which airlines borrow funds secured by future airline ticket sales, are facing a 'default' crisis due to the impact of the novel coronavirus disease (COVID-19). As airlines struggling with financial difficulties face tightening corporate bond markets and increasing pressure for early redemption of ABS, the burden of liquidity management is rapidly growing. If airlines fail to repay principal and interest, banks that have extended credit to these ABS will bear the debt, raising concerns that ABS could become a financial time bomb for the banking sector.

According to the Financial Supervisory Service on the 14th, as of the end of last year, the outstanding ABS issuance amounts for Korean Air and Asiana Airlines were 1.7136 trillion won and 806 billion won respectively, totaling approximately 2.52 trillion won. Among these, the ABS issuance amounts downgraded by Korea Credit Rating on the 10th were 1.32 trillion won for Korean Air and 422.8 billion won for Asiana Airlines.

The problem is that due to COVID-19, airline ticket sales, which are the repayment source for ABS, have plummeted, potentially triggering an 'early redemption trigger' requiring repayment before maturity. Many recently issued ABS include forced redemption options linked to corporate bond credit ratings. These special clauses require early repayment if credit ratings fall. For Asiana Airlines ABS, reasons for early payment include reaching below BBB- corporate bond credit rating, failing to meet certain debt repayment ratios, or defaulting on other borrowings. ABS recovery performance in March showed a decrease of 42.3% to 99.7% year-on-year for Asiana Airlines and 67.7% to 84.1% for Korean Air, indicating a critical situation. If the average performance over the three months from March to May remains this poor by the end of next month, the early redemption trigger will be activated. With the corporate bond and ABS markets both shrinking, if airlines fail to make early ABS repayments, there is a possibility of a cascade of repayment demands on other debts.

An airline official said, "In the case of Asiana Airlines, there is room for financial structure improvement after acquisition by HDC Hyundai Development Company, and Korean Air plans to respond through the sale of idle assets, but the shock from COVID-19 is expected to continue for some time," adding, "Since airlines have limited capacity to respond on their own, government-level support is urgently needed."

Banks are also concerned about being hit by the fallout from the airline ABS crisis. Since airlines are experiencing severe liquidity shortages, they may be unable to repay ABS even after the early redemption trigger is activated, forcing banks that have extended credit to bear the debt.

Among the 468.8 billion won (7 cases) of Asiana Airlines ABS downgraded by Korea Credit Rating from 'BBB+' to 'BBB', IBK Industrial Bank of Korea has provided credit enhancement for 315.8 billion won (3 cases). If airline ticket sales remain poor until the end of next month, forced early redemption will be required, and IBK will have to bear the burden.

An IBK official explained, "We provided credit enhancement for three Asiana Airlines ABS cases, with an initial enhancement amount of 330 billion won, but continuous repayments have reduced the remaining balance to about 150 billion won. We believe the likelihood of the early redemption trigger activating is low, but we are monitoring the prolonged COVID-19 situation and airline response measures as ticket sales are declining."

The Korean Air ABS, for which Shinhan Bank has been the main credit provider, already triggered the early redemption clause at the end of last month. This is a foreign currency ABS issued in October 2018 worth 350 million dollars (approximately 430 billion won). It is based on the North American route, and the clause requires early redemption if more than 40% of flights are canceled due to COVID-19. Shinhan Bank has distributed credit risk, with Shinhan, IBK, and KB Kookmin Bank each providing about 120 billion won in credit, and NongHyup Bank about 60 billion won. Shinhan Bank has postponed the declaration of early redemption to the end of September as a reluctant measure.

A Shinhan Bank official said, "The COVID-19 situation may prolong, and Korean Air is currently preparing self-help measures," adding, "We may temporarily defer the declaration of early redemption again, but it is still difficult to predict."

Commercial banks have already reduced loans to airlines but are closely watching the risks arising from ABS credit extensions. Credit rating agencies estimate that since ABS have been considered safe assets and actively traded, banks likely hold a significant amount of ABS directly.

A commercial bank official said, "It will take time for air travel demand to normalize due to COVID-19, and there is a considerable possibility that the airline ABS early redemption trigger will be activated," adding, "We are closely monitoring the market situation as there is potential for financial structure improvement through airlines' asset sales and government support."

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