‘Despite Repeated Financial Support from Korean Air’ Asiana Airlines, 7 Trillion Won Debt Cycle

Successful Refinancing of 475 Billion Won Perpetual CB with Korean Air Support
Reducing High-Interest Loan Burden
25 Trillion Won in Loans Maturing Within One Year
Financial Burden Continues Until Merger Completion

Asiana Airlines, whose merger with Korean Air has been delayed for four years, is alleviating its financial burden with funding support from Korean Air. However, the maturity of 7 trillion won in borrowings, including high-interest perpetual convertible bonds (perpetual CBs) exceeding 1 trillion won, continues to cycle repeatedly, causing pressure to repay principal and interest. The large-scale debt burden is expected to persist until the merger with Korean Air is finalized.

Asiana Airlines’ 475 billion won Perpetual CB Acquired by Korean Air... Financial Burden ↓

According to the investment banking (IB) industry on the 28th, Asiana Airlines recently succeeded in issuing 175 billion won worth of perpetual CBs. The maturity is 30 years, but there is a condition to exercise an early redemption option (call option) after one year to repay principal and interest. Investors may convert the perpetual CBs into shares at a predetermined price depending on the case. Asiana Airlines used the raised funds to repay existing high-interest perpetual CBs. Korean Air, which is promoting the merger with Asiana Airlines, acquired all of the newly issued perpetual CBs.

With Korean Air’s support, Asiana Airlines succeeded in significantly lowering the interest rate on the perpetual CBs. The interest rate on perpetual CBs issued to securities firms in 2022 rose to 8.5% due to failure of early redemption, increasing interest expenses. Accordingly, Asiana Airlines was able to save 6 billion won annually (equivalent to 3.4 percentage points (p) in interest). Korean Air’s large-scale capital injection eased the financial burden of Asiana Airlines, which is scheduled to merge.

In November last year, Asiana Airlines also issued 300 billion won in perpetual CBs with Korean Air’s support. The structure of the perpetual CBs issued at that time also allowed exercising a call option after one year, with an interest rate set at 4.7%. With Korean Air’s support, the interest rate was lowered by a remarkable 7.8 percentage points from nearly 12.5%, reducing annual interest expenses by about 23 billion won. Due to Korean Air’s successive support, it is analyzed that Asiana Airlines reduced annual interest expenses by approximately 29 billion won.

'Korean Air-Asiana Airlines' Merger Delay Causes Debt Maturity Cycle

However, Asiana Airlines’ financial burden continues as the maturity of more than 7 trillion won in high-interest borrowings, including perpetual CBs exceeding 1 trillion won, keeps recurring.

The 400 billion won perpetual CB issued in 2019 to policy banks such as the Korea Development Bank and the Export-Import Bank failed early redemption, causing the interest rate to rise to 10.20%. The 300 billion won perpetual CB issued in 2020 also saw interest rise to 12.45%. Asiana Airlines repaid 180 billion won of these, leaving 120 billion won in high-interest perpetual CBs outstanding. The repayment of 100 billion won worth of perpetual CBs issued in 2019 has also been delayed, with interest rates approaching 9.7%. If the call option is not exercised to repay the borrowings early, interest expenses will increase significantly.

The maturity of general borrowings excluding perpetual CBs also continues to come due. Among Asiana Airlines’ total borrowings, short-term borrowings and long-term current liabilities (long-term borrowings with less than one year remaining maturity) that must be repaid within one year exceed 2.5 trillion won. As market interest rates rise, the interest burden on borrowings has increased significantly compared to the past. The possibility of increased interest rate volatility during debt refinancing cannot be ruled out.

An IB industry official said, "The merger between Korean Air and Asiana Airlines has been delayed for four years, and the maturity of Asiana Airlines’ borrowings amounting to 7 trillion won keeps recurring," adding, "Borrowings that were relatively low-interest in the past are gradually turning into high-interest borrowings over time, causing financial burdens for Asiana Airlines."

Meanwhile, the European Commission (EC) recently selected Air Incheon as the preferred bidder for the sale of the cargo business, a condition for approving the Asiana Airlines merger. Air Incheon is reported to have secured acquisition funds with financial investors (FIs) including Korea Investment Partners, Korea Investment & Securities, and Shinhan Investment Corp. Korean Air plans to complete the cargo sale process by October.