Korean Air to raise $817 mn in rights issue; in talks with PEFs on asset sales

Korean Air Lines Co. Ltd. unveiled its largest rights offering plan on May 13 to raise 1 trillion won ($817 million) for debt repayment, after it opened discussions with private equity firms on a possible sale of business divisions such as in-flight catering and maintenance services.

The rights issue plan followed a 1.2 trillion won bailout package announced by two state-run banks last month to help the country’s flagship carrier survive one of the industry’s worst downturns caused by the coronavirus pandemic.

If the new share issues are completed in July as planned, Korean Air will secure a total of 2.2 trillion won in fresh capital, including the 1.2 trillion won bailout money.

Apart from the rights offering, the airline has recently received proposals from leading private equity groups to sell in-flight catering and maintenance, repair and overhaul (MRO) operations in a package deal. The Korean Invetors reported on April 27 that the carrier was considering selling them.

Korean Air is in early-stage talks with the unidentified private equity firms for the proposed package deal that is expected to bring between 1.5 trillion won and 2.5 trillion won, according to financial industry sources on May 12.

“Korean Air is studying the proposals from the PEFs, but little progress has been made so far,” said one of the sources.

Under the rights issue plan, Korean Air will place new common shares worth 1 trillion won to its existing shareholders for 12,600 won apiece. That will mark the biggest share sale for the airline in its 58-year history.

The offering price represents a 31% discount to its closing price of 18,200 won on May 13.

SHOT IN THE ARM

Fresh capital from the rights issue will slash its debt-to-equity ratio to around 600% from 871% in the fourth quarter of last year.

Industry sources, however, warned that the new shares would be just a shot in the arm and not address the deteriorating liquidity problem at the airline. Passenger traffic, which accounts for 70% of Korean Air’s total revenues, has plunged by more than 80%.

In May and June, Korean Air should pay off more than 870 billion won of debt, on top of 500-600 billion won in monthly fixed expenses such as aircraft lease fees.

“Unless the Covid-19 subsides within the first half, Korean Air will likely look to sell other hotels (it owns),” said an airline industry source.

Separately, the carrier is seeking to sell non-core assets, including the 37,000-square-meter undeveloped land in Seoul, a resort in west of Seoul and a hotel in Jeju Island. They are estimated to be worth 500 billion to 600 billion won in aggregate.

But creditors led by the state-run Korea Development Bank have been pushing Korean Air to put core businesses such as in-flight meal service, the frequent flyer program and maintenance operations on the market. They estimated that the airline would face a cash shortage of more than 5 trillion won this year.

“We are making effort to secure liquidity by selling idle assets and air tickets in advance and through business reorganization, said a Korean Air source. Its executives have returned up to half of their salaries and about 70% of employees are taking a six-month leave of absence.

Further, a US hedge fund with a minority stake in Korea Airport Service Co. Ltd., a majority owned by Korean Air, has recently called on the carrier to include the baggage handling and laundry service unit in the list of assets to sell.

Meanwhile, Hanjin Kal, Korean Air’s biggest shareholder with a 30% stake, needs to raise up to 300 billion won to buy the new shares of the airline. Its cash and cashable assets stood at 141.1 billion won at the end of 2019.

Write to Sang-eun Lucia Lee and Sun-a Lee at selee@hankyung.com


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