[Funding] Hanjin Kal Issues 14 Billion Private Bonds for Jin Air Capital Increase

Financial Burden Increases Due to Poor Performance and Affiliate Support

[Asia Economy Reporter Lim Jeong-su] Hanjin KAL issued a private bond worth 14 billion KRW to participate in the capital increase of its subsidiary Jin Air. Financial burdens continue to expand due to poor performance of affiliates caused by COVID-19 and financial support for subsidiaries.

According to the investment banking (IB) industry on the 7th, Hanjin KAL issued private bonds worth 14 billion KRW with a 2-year maturity under the management of Hanyang Securities. The issuance interest rate was set at 3.97%. Currently, with the credit rating having dropped to BBB0 and a continued deficit trend, it is practically difficult to issue public bonds.

This is the first time since April this year that Hanjin KAL has raised funds by issuing private bonds. At that time, Hanjin KAL issued private bonds worth 10 billion KRW with a 1-year maturity at an interest rate of 3.205%. As market interest rates show an upward trend and the spread added according to creditworthiness widened, the funding interest rate increased.

The raised funds are known to have been injected into the capital increase of its subsidiary Jin Air. Jin Air, having fallen into capital erosion due to consecutive losses caused by COVID-19, recently carried out a shareholder allocation capital increase worth 123.8 billion KRW.

Hanjin KAL newly invested about 56.7 billion KRW in Jin Air according to its shareholding ratio. By participating in the shareholder allocation capital increase, Hanjin KAL maintains a majority stake with a 55% share in Jin Air. Jin Air will escape from complete capital erosion through this capital increase.

Hanjin KAL’s financial burden has expanded due to poor performance and support for affiliates. Based on individual financial statements, borrowings increased from 363.3 billion KRW at the end of 2019 before the COVID-19 outbreak to 887.2 billion KRW at the end of the first half of this year. As of the end of June, short-term borrowings and current portion of long-term debt due within one year approach 320 billion KRW.

With a heavy borrowing burden, the annual EBITDA is expected to fall below 20 billion KRW for two consecutive years until the end of this year. Annual financial costs including interest on borrowings exceed 20 billion KRW, making it difficult to cover interest expenses.

An IB industry official said, "There is a possibility that Hanjin KAL will improve its financial structure through the sale of Jin Air during the low-cost carrier (LCC) integration process," adding, "With the phased return to normal life (with COVID-19), the performance of Korean Air and Jin Air is bottoming out and improving, so the worsened financial situation is expected to gradually recover."