COVID-19 and Paid Capital Increase... Impact on Hanjin's Management Rights Dispute

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] As the aviation industry faces a crisis due to the novel coronavirus infection (COVID-19) pandemic, Korean Air is preparing countermeasures, including deciding on a rights offering soon. With the Hanjin Group management rights dispute entering its second round, there is growing interest in how the aftermath of the COVID-19 situation and the upcoming rights offering will affect the dispute.

According to the business community on the 3rd, Korean Air will hold a board meeting this month to formally discuss the rights offering issue. Earlier, Korean Air had been reviewing a plan to carry out a rights offering worth up to 1 trillion KRW amid liquidity problems caused by the COVID-19 crisis.

◆ "Rights Offering Unavoidable" = As the damage from COVID-19 became a reality, Korean Air introduced a rotational leave system for all employees and began implementing self-help measures centered on selling idle assets such as the Jongno Songhyeon-dong site and Wangsang Leisure Development Co., Ltd. At the end of March, it also issued asset-backed securities (ABS) worth 622.8 billion KRW based on accounts receivable.

At the end of last month, the Korea Development Bank and the Export-Import Bank of Korea decided to provide 1.2 trillion KRW in funds to Korean Air, including operating funds support, ABS acquisition, and perpetual bond acquisition. This has eased Korean Air's financial strain.

However, in the business community, there is a dominant analysis that additional self-help measures are inevitable since Korean Air's flight operation rate has plummeted to around 10% due to entry restrictions by various countries amid COVID-19, and borrowings that must be refinanced or repaid within the year approach 4 trillion KRW. An industry insider explained, "The government has also decided to provide financial support on the premise of Korean Air's additional self-help plan, so this is an unavoidable step."

◆ Will It Affect the Hanjin KAL Shareholding Battle? = Inside and outside the business community, attention is focused on the impact of this rights offering on the Hanjin Group management rights dispute. Earlier, Chairman Cho Won-tae won a decisive victory at the March shareholders' meeting, the first round against the "Shareholders' Coalition for Hanjin Group Normalization (3-party coalition)" composed of private equity fund KCGI, Bando Construction, and former Korean Air Vice President Cho Hyun-ah. However, recently, the 3-party coalition expanded its shareholding to 42.75%, putting Chairman Cho at a relatively disadvantageous position.

Therefore, interest is concentrated on the method of the rights offering. The business community expects the rights offering to be conducted as a general public offering of forfeited rights shares. This means that existing Korean Air shareholders are granted rights to subscribe for shares, and any forfeited rights shares are offered to general investors. Hanjin KAL currently holds a 29.96% stake in Korean Air.

If the rights offering is decided in this way, Hanjin KAL would need to raise about 300 billion KRW. As of the end of last year, Hanjin KAL had about 140 billion KRW in cash and cash equivalents, so it is highly likely to conduct a rights offering to participate in Korean Air's rights offering. Currently, in the Hanjin KAL management rights dispute, the 3-party coalition (42.75%) has surpassed Chairman Cho's friendly shares (41.30%), so there is a significant possibility of changes in this shareholding competition.

◆ Uncertain Direction Amid COVID-19 Crisis = The fact that the aviation industry's crisis triggered by COVID-19 will not be resolved quickly is also a factor making it difficult to predict the direction of the management rights dispute. Already, global aviation industry analyses suggest that it may take 2 to 3 years for air travel demand, which has shrunk due to the COVID-19 pandemic, to return to normal. Even if either side wins, they cannot simply celebrate.

Moreover, with the government's financial support, the Korea Development Bank and the Export-Import Bank of Korea plan to acquire 300 billion KRW worth of Korean Air's perpetual bonds, which, when converted to shares, would amount to nearly 10.8%. Adding the existing National Pension Service's stake, the government's shareholding could rise to around 20%. This introduces a new variable in the management rights dispute.

In fact, after the government's financial support plan was announced, Korean Air issued a statement saying, "We will first stop the exhausting shareholding competition with the 3-party coalition against the holding company Hanjin KAL and focus on overcoming the immediate crisis."

A business community official said, "Neither Chairman Cho's side nor the 3-party coalition could have anticipated scenarios like the COVID-19 crisis and government financial support," adding, "Since Korean Air is a core affiliate of the Hanjin Group, both sides are now in a difficult situation."

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