[Funding] Air Busan Struggles to Improve Financial Structure

Promotion of capital increase after potato... Concerns over reduced fundraising due to sluggish stock price
Airline stocks marginalized amid COVID-19 resurgence

[Asia Economy Reporter Hyungsoo Park] Air Busan has embarked on improving its financial structure. Following a capital reduction and the issuance of perpetual convertible bonds, it is also pursuing fundraising through a rights offering.

According to the Financial Supervisory Service's electronic disclosure system on the 11th, Air Busan will conduct a rights offering followed by a general public offering of forfeited shares, issuing 0.255 new shares per existing share. The planned issue price for the new shares is 2,865 KRW, with a total of 52 million shares to be issued, raising 149 billion KRW. The funds raised will be used for operating expenses such as aircraft maintenance fees and fuel costs. The company plans to return six aircraft this year, and the return cost of 59 billion KRW from five of these aircraft will also be covered by the capital increase funds.

In the first quarter of this year, Air Busan recorded sales of 50.8 billion KRW, an operating loss of 36.3 billion KRW, and a net loss of 61.9 billion KRW. Compared to the same period last year, sales increased by 59%, and the scale of losses decreased. As of the first quarter, domestic passenger sales accounted for 87.55% of total sales, while international passenger sales accounted for 3.20%.

As of the end of the first quarter, Air Busan's debt ratio was 1,431.5%, up 757.9 percentage points from the end of last year. The dependence on borrowings worsened to 56.6% compared to the end of last year. Current liabilities as of the end of the first quarter include accounts payable and accrued expenses of 74.5 billion KRW, current lease liabilities of 82.8 billion KRW, current provisions of 51.4 billion KRW, and short-term borrowings of 27 billion KRW, totaling 263.7 billion KRW. After returning the aircraft as planned, current liabilities are expected to decrease by nearly half to 130.3 billion KRW.

Due to continued losses amid the COVID-19 pandemic, Air Busan is pursuing various measures to improve its financial structure. Last month, Air Busan issued 10 billion KRW worth of perpetual convertible bonds to institutional investors. The nominal interest rate is 5.9%, and the maturity interest rate is 6.7%. The bond maturity date is July 19, 2052, with a lump-sum repayment condition on the maturity date. The funds raised will be used to repay unpaid lease fees to Asiana Airlines.

A 3-for-1 capital reduction was also carried out. As a result of the capital reduction, the capital stock decreased to 64.6 billion KRW, while a capital reduction gain of 193.9 billion KRW was generated. The deficit, which was about 402 billion KRW as of the first quarter, will be reduced to 208.1 billion KRW. With the capital increase effect from the rights offering added, the financial structure is expected to improve.

However, the scale of fundraising through the capital increase depends on the stock price trend after the capital reduction. The initial planned issue price was about 7.6% lower than the 3,100 KRW issue price expected at the board meeting. This was due to the poor performance of airline stocks caused by deteriorated investor sentiment amid the resurgence of COVID-19. The average stock price from July 11 to July 21, before the trading suspension due to the capital reduction, was lower than at the time of the board resolution.

Air Busan resumed trading after the capital reduction on the same day. The stock price closed at 4,035 KRW, down 1.34% from the reference price. The trading volume was only 1.6 billion KRW. The issue price for the new shares will be finalized on the 14th of next month. The issue price may increase depending on the stock price just before the subscription date.