Key Issues in Renegotiation... Embarrassing Asiana and Kumho Group

Asiana Airlines' preliminary bidding is just one day away, but the atmosphere surrounding the acquisition is lukewarm. The decline in the growth rate of the aviation industry and the deterioration of Asiana Airlines' financial structure are the biggest obstacles. According to the aviation industry and investment banks, Kumho Industrial and the sales advisory firm Credit Suisse Securities (CS Securities) will conduct the preliminary bidding for the sale of Asiana Airlines on the 3rd. The photo shows the Kumho Asiana headquarters on Ujeongguk-ro, Jongno-gu, Seoul, on the 2nd. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporters Kangwook Cho, Jehun Yoo] The merger and acquisition (M&A) process for Asiana Airlines has reached a critical turning point. As HDC Hyundai Development Company (HDC Hyundai) has requested renegotiations with the creditors, including KDB Industrial Bank, regarding the terms of the Asiana Airlines acquisition, issues such as the adjustment of the price for Asiana Airlines' old shares, conversion of perpetual bonds into equity, and additional support measures are emerging as key points of contention. Kumho Industrial and Asiana Airlines, both pushed to the brink, are closely monitoring the outcome of these renegotiations.

According to sources from the financial and aviation industries on the 10th, the creditors, including KDB, discussed HDC Hyundai’s request to reconsider the previously announced acquisition terms for Asiana Airlines. The creditors acknowledge that changes to the acquisition terms are somewhat inevitable but are taking a cautious stance by first understanding the conditions HDC Hyundai desires.

◆ Key Issues in Renegotiations: Price Adjustment, Additional Support, Conversion of Perpetual Bonds = The main points of renegotiation between the two sides are expected to be price adjustment, conversion of perpetual bonds into equity, and additional financial support. The primary issue is the price of the old shares. At the end of last year, HDC Hyundai agreed to purchase 30.77% of Asiana Airlines shares held by Kumho Industrial at 4,700 KRW per share, totaling 322.8 billion KRW. This amount fell short of the 400 billion KRW range Kumho Industrial had hoped for. However, due to the COVID-19 pandemic, which severely impacted business operations and stock prices, even this amount is no longer secure. In fact, Asiana Airlines’ stock price plummeted to 2,270 KRW on March 19, directly hit by COVID-19. Therefore, there is a possibility that HDC Hyundai will renegotiate with the creditors over the price it must pay Kumho Industrial for the old shares.

The option to convert 500 billion KRW worth of perpetual bonds into equity is also likely to be on the negotiation table. The creditors have expressed willingness to consider the request for conversion of Asiana Airlines’ perpetual bonds into equity. Perpetual bonds are a form of convertible bonds (CB) that can be converted into shares. In April last year, the creditors supported Asiana Airlines with 1.6 trillion KRW and acquired 500 billion KRW worth of perpetual bonds. If converted into equity, the creditors are expected to hold about 30% of the shares. From HDC Hyundai’s perspective, converting the high-interest perpetual bonds (around 7%) into equity would eliminate financial costs. However, from the creditors’ standpoint, acquiring new shares in Asiana Airlines is a burden. There is also speculation that HDC Hyundai may oppose the conversion since it would mean the creditors holding equity in Asiana Airlines.

Additionally, the possibility of further support through the 40 trillion KRW Industrial Stabilization Fund has been raised. The creditors are reportedly considering injecting the Industrial Stabilization Fund into Asiana Airlines.

◆ Kumho Cornered = As renegotiations gain momentum, red flags have been raised for Kumho Group and Asiana Airlines. If the issue of adjusting the old share price comes up at the negotiation table, Kumho Group’s plan to use the proceeds for business normalization will inevitably face setbacks.

Kumho Group, which decided to sell Asiana Airlines, has a simple ownership structure: 'Former Chairman Park Sam-gu and related parties → Kumho Express → Kumho Industrial,' but it is complicated by intertwined collateral and loans. Kumho Express borrowed 130 billion KRW from KDB Industrial Bank last year to repay a loan secured by Kumho Industrial shares but failed to repay it in April and extended the maturity. As of the end of last year, Kumho Express’s cash and cash equivalents stood at about 20 billion KRW.

In this situation, if the proceeds from the sale of old shares are significantly reduced or negotiations break down, Kumho Group itself could face a liquidity crisis. A Kumho Group official said, "Although the acquirer requested renegotiations, specific issues such as the old share price were not mentioned," adding, "We will observe the discussions between the acquirer and the creditors." An industry insider commented, "From the acquirer's perspective, even if the new shares are invested in Asiana Airlines, the old share payment goes entirely to Kumho Group, a third party, so they will try to reduce it as much as possible," adding, "If this is not accepted, the creditors might consider a capital reduction option."

◆ Increased Uncertainty for Asiana = Asiana Airlines has also fallen into a swamp of uncertainty with no clear path forward. In particular, if renegotiations fail, Asiana Airlines will have no choice but to enter corporate rehabilitation proceedings. It is known that the creditors have already prepared a 'Plan B' in anticipation of contract termination.

Inside and outside the financial sector, it is believed that Plan B includes keeping Asiana Airlines under creditor management for the time being after the acquisition fails and attempting resale once the business environment improves, as well as separating and selling Asiana Airlines and its affiliates such as Air Busan and Asiana IDT. To prepare for this, the creditors recently reviewed the case of Japan Airlines (JAL), a Japanese carrier. JAL entered corporate rehabilitation proceedings (formerly court receivership) in 2010, wrote off about 6 trillion KRW in debt, and received a paid-in capital increase of about 3.8 trillion KRW from a public institution-like corporate rehabilitation support organization, receiving a total of 13 trillion KRW in public funds.

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