Jin Air, Perpetual Bonds Taken Over by Securities Firms... Unstable Capital Increase

[Asia Economy Reporter Lim Jeong-su] Jin Air's issuance of perpetual bonds (hybrid capital securities) has failed to attract sufficient investors, increasing the underwriting burden on securities firms. The cold response from investors is expected to negatively impact the planned rights offering of around 100 billion KRW.

According to the investment banking (IB) industry on the 20th, securities firms absorbed a significant portion of the 75 billion KRW perpetual bonds issued by Jin Air on that day and securitized them. The lead manager, Korea Investment & Securities, transferred about 20 billion KRW worth of perpetual bonds, which it could not find investors for, to a special purpose company (SPC). The SPC then issued asset-backed commercial paper (ABCP) and asset-backed short-term bonds (ABSTB) with short maturities, using these bonds as underlying assets.

Other securities firms, including Kiwoom Securities, also plan to absorb Jin Air’s perpetual bonds and securitize them in the same manner. These securities firms will provide credit enhancements such as liquidity support agreements to the SPC, thereby assuming risks related to interest payments on the perpetual bonds and potential early redemption failures.

Jin Air’s perpetual bonds have a maturity of 30 years but allow for additional maturity extensions. From one year after issuance, Jin Air can exercise a call option to redeem the principal early. If Jin Air does not exercise the call option after one year, it must pay investors interest at the initial rate of 6% plus additional interest. This functions as a kind of forced early redemption clause.

An investment institution official stated, "Jin Air is currently in a state of capital erosion, and with the prolonged COVID-19 pandemic, it is still difficult to expect travel demand to recover to past levels in the short term. At present, the likelihood of early redemption of the perpetual bonds is low, and with market interest rates trending upward, there is not much demand for perpetual bonds issued by airlines."

Attention is focused on whether the cold investor response will also negatively affect the rights offering. Jin Air plans to conduct a rights offering of around 100 billion KRW in November through a shareholder allocation followed by a general public offering of unsubscribed shares. Korea Investment & Securities and Kiwoom Securities, which underwrote the perpetual bonds, are jointly acting as lead managers. Other underwriting securities firms participating in the syndicate, including Eugene Investment & Securities, DB Financial Investment, and Kyobo Securities, have agreed to divide and absorb any unsubscribed shares if new investors do not appear.

If investors cannot be gathered, the underwriting burden on securities firms will increase accordingly. The participation of major shareholders, such as Cho Won-tae, chairman of Hanjin Group who holds a 5.78% stake, is also expected to influence the success of the rights offering.

An IB industry official said, "It is difficult to predict how long the low-cost carrier (LCC) sector’s slump will continue, and with ongoing concerns about capital erosion, repeated rights offerings cannot be ruled out. Given the current market sentiment, securing investors will not be easy."

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