Korean Air takes risky option to take over debt-stricken domestic rival Asiana

By Lim Chang-won Posted : November 16, 2020, 13:51 Updated : December 9, 2020, 08:06

[Yonhap Photo]

SEOUL -- Based on financial support from state banks which hope to create the world's 10th largest airline, South Korea's top flag carrier Korean Air took a risky option to take over its domestic rival, Asiana Airlines, which is reeling from snowballing debt and a credit crisis caused by a COVID-19 pandemic.

The deal triggered concern about the financial structure of Korean Air and its parent group, Hanjin, which have been under pressure to cut down on borrowings through restructuring and the disposal of non-core assets. However, creditors found a good excuse, saying South Korea's aviation industry should strengthen its fundamental competitiveness in preparation for a post-pandemic era.

Hanjin KAL, the holding company of Hanjin Group, said in a regulatory filing on November 16 that Korean Air would buy Asiana's new shares worth 1.5 trillion won ($1.35 billion) and bonds in a deal arranged by the state-run Korea Development Bank (KDB). The acquisition would be completed on June 30, 2021.

To finance the deal, KDB secured government approval to invest 500 billion won in shares to be issued by Hanjin KAL and 300 billion won in convertible bonds. In return, Korean Air would push for a 2.5 trillion won paid-in capital increase. State banks have already injected an emergency credit of 1.2 trillion won into Korean Air and more is to come.

The deal came two months after creditors led by KDB dumped negotiations with a consortium led by HDC Hyundai Development, a comprehensive construction company. In December 2019, HDC agreed with creditors to acquire a 30.77-percent stake in Asiana and its affiliates. However, both sides have failed to narrow differences over acquisition terms.

HDC had asked for renegotiations, citing Asiana's capital erosion and snowballing debt. Asiana has seen a sharp drop in sales due to suspended services on international routes, prompting state banks to rescue it with emergency loans estimated at more than 3.3 trillion won.

The entire stake held by Hanjin Group's new chairman Cho Won-tae in Hanjin KAL will be offered as collateral and he may have to step down "if his management performance is insufficient," KDB vice president Choi Dae-hyun told reporters, adding the deal is aimed at achieving timely restructuring when the global aviation market is in "fierce competition."

"The move is aimed at resolving liquidity problems of the two companies before the end of the year by making early investments," Choi said. "There will be no reduction in consumer benefits due to monopoly. Rather, routes and schedules will be diversified and consumer benefits such as mileage integration are expected to increase."

The Ministry of Land, Infrastructure and Transport said the deal would create synergy effects and strengthen the competitiveness of South Korea's aviation industry. "The global aviation industry is seeking to realize economies of scale through mergers and acquisitions among airlines and diversify its business models through enlargement," said Kim Sang-do, head of the ministry's aviation policy division.

"Not only has a lot of government support been put in so far, but we need a large amount of additional funding next year," Kim said, adding the integration of Korean Air and Asiana would reduce a huge burden on the government. "There is no significant (personnel) reduction because we are trying to realize economies of scale," said Kim.

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