Korea Development Bank and Korea Mercury Approve 1.2 Trillion KRW Support for Korean Air

Special Agreement Signed Based on Self-Rescue Plan Including 1 Trillion Won Paid-in Capital Increase and Site Sale

[Asia Economy Reporter Kangwook Cho] KDB Industrial Bank and Korea Eximbank have given final approval to a plan to support Korean Air with 1.2 trillion KRW. The two state-run banks are expected to sign a special agreement with Korean Air based on a financial restructuring plan (self-help plan). The self-help plan is understood to include a 1 trillion KRW rights offering, the sale of land in Songhyeon-dong, Jongno-gu, Seoul, and the sale of shares in Wangsang Leisure Development Co., Ltd., the operator of Wangsang Marina.

According to financial sources on the 26th, KDB Industrial Bank held a credit committee meeting that morning and finalized the support plan for Korean Air. Korea Eximbank held a loan committee meeting the previous afternoon to discuss and ultimately approve the support plan. This is a procedure to implement the Korean Air support plan announced by the creditors' group on the 24th of last month.

The creditors' group decided to support Korean Air with a total of 1.2 trillion KRW, including the acquisition of asset-backed securities (ABS) worth 700 billion KRW, acquisition of approximately 300 billion KRW in perpetual bonds (with stock conversion rights granted one year after issuance), and a 200 billion KRW loan for operating funds. The burden ratio between KDB Industrial Bank and Korea Eximbank is 6 to 4.

With the final approval of the Korean Air support plan, the two state-run banks will proceed with signing a special agreement with Korean Air. In this regard, Korean Air and its major shareholder Hanjin KAL held an extraordinary board meeting the previous afternoon to discuss the contents of the special agreement. Korean Air later announced that, according to the special agreement, Hanjin KAL will provide as collateral all newly issued common shares of Korean Air worth approximately 300 billion KRW, which it will acquire by participating in Korean Air’s rights offering, and will delegate disposal rights to the creditors' group. Furthermore, Hanjin KAL stated in a disclosure that "the provision of collateral under the special agreement is scheduled to take place in January 2022 if Korean Air fails to meet certain conditions by the end of next year." Although the specific 'certain conditions' have not been disclosed, the market estimates they include asset sales and successful rights offerings promised by Korean Air, financial restructuring such as maintaining debt ratios, and risk management.

A creditor group official explained, "Korean Air must raise more than 2 trillion KRW in capital by the end of next year, and if it fails to raise a certain amount, it must provide collateral." It is known that the creditors' group wants Korean Air to raise at least 1 trillion KRW in capital.

Previously, the creditors' group requested Korean Air to submit a self-help plan worth more than 1.5 trillion KRW. The self-help plan included a 1 trillion KRW rights offering and asset sales such as the land in Songhyeon-dong, Jongno-gu, Seoul, and shares in Wangsang Leisure Development, the operator of Wangsang Marina. However, the sale of the in-flight catering and aircraft maintenance (MRO) business units, which are classified as prime business divisions, was reportedly not included in the self-help plan.

The creditors' group estimates that Korean Air’s debt to be repaid this year, including corporate bonds, ABS, and borrowings, amounts to 3.8 trillion KRW. With the creditors' group supporting 1.2 trillion KRW, Korean Air’s 1 trillion KRW rights offering, and 300 billion KRW convertible bond issuance, the immediate liquidity crisis can be alleviated. However, considering fixed monthly costs such as aircraft lease fees of 500 to 600 billion KRW and annual financial costs around 500 billion KRW, there is analysis that liquidity secured through this support alone is insufficient to overcome the crisis.

Market speculation suggests that additional support for Korean Air will be provided through the 40 trillion KRW Industrial Stabilization Fund. The government has set eligibility criteria for support among the aviation and shipping industries, requiring companies to have total borrowings of 500 billion KRW or more and at least 300 employees. Korean Air is considered the top priority company meeting these criteria. As of the first quarter of this year, Korean Air’s total borrowings, including lease liabilities, amount to 11.3514 trillion KRW. In the case of Asiana Airlines, there is speculation that it may not request funding from the Industrial Stabilization Fund because liquidity in the 2 trillion KRW range could be supplied once the acquisition by Hyundai Development Company is completed.

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