[Funding] Korean Air Issues 270 Billion KRW ABS Private Placement Supported by KDB and KEXIM

Repayment of Principal and Interest Using Aircraft Fare Receivables
Consideration for Existing ABS Investors with Lump-Sum Maturity Repayment Structure

Korean Air passenger plane standing on the ramp at Gimpo Airport, Gangseo-gu, Seoul

[Asia Economy Reporter Lim Jeong-su] Korean Air raised 270 billion KRW by issuing asset-backed securities (ABS). With KDB Industrial Bank and the Export-Import Bank of Korea (government policy banks) planning to support Korean Air with about 2 trillion KRW by the end of the year, it is understood that the urgent funds needed to put out the immediate fire were executed through ABS.

According to the investment banking (IB) industry on the 18th, Korean Air recently privately issued ABS worth 270 billion KRW under the lead of Korea Investment & Securities. The maturity is 5 years with an interest rate of 4.20%. Aircraft fare receivables generated over the next 5 years until maturity will be used as the repayment source for the ABS.

The ABS issued by Korean Air this time has a structure of full repayment at maturity. This contrasts with most of the previously issued ABS, which had a partial repayment structure. It is interpreted as a measure to maintain the repayment priority of existing ABS investors.

An IB industry official said, "Due to the COVID-19 pandemic, passenger fare revenue is almost non-existent except for cargo fares," adding, "In a situation where even the repayment of ABS issued through public offerings is uncertain, issuing ABS with a partial repayment structure could cause conflicts in repayment priority with existing investors."

The credit rating of the ABS was assigned A(sf). This is two notches higher than Korean Air’s current credit rating of BBB+ (under review for downgrade). Generally, aircraft fare ABS is rated two notches higher than the company’s general bond credit rating because the fare receivables serve as a kind of collateral.

Also, this ABS was issued privately, making it difficult to sell in the secondary market. This contrasts with most existing ABS, which were issued through public offerings involving multiple institutional investors. An industry insider explained, "The government policy banks acquired Korean Air’s ABS as an emergency fund support," adding, "They skipped the public offering process and issued ABS privately in the sense that repayment is deferred until maturity."

The government policy banks had previously announced plans to support Korean Air with a total of 1.2 trillion KRW. The plan is to provide funds divided into a 200 billion KRW loan, 700 billion KRW ABS acquisition, and 300 billion KRW acquisition of perpetual convertible bonds (CB).

Choi Dae-hyun, Vice President of Corporate Finance at the Industrial Bank, hinted at additional funding during a major issue briefing the day before, stating, "Korean Air will need an additional 800 billion KRW by the end of the year besides the 1.2 trillion KRW," suggesting further financial support. Adding this up, the government’s total financial support for Korean Air is expected to increase to 2 trillion KRW by the end of the year.

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