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Airline restructurings

S.Korea's airline restructuring hits turbulence with activist fund opposition

Nov 27, 2020 (Gmt+09:00)



South Korea’s airline restructuring is experiencing some turbulence after an activist group has filed an injunction threatening the proposed merger between the country’s two flag carriers.

Korean Air Lines Co. announced its plans to acquire the debt-laden Asiana Airlines Inc. on Nov. 16 to keep the country’s No. 2 airline afloat; in a deal that would create the world’s seventh-largest airline.

The plan was confirmed by relevant authorities, including the state-run Korean Development Bank (KDB), the main creditor of both airlines.

To facilitate the deal, KDB said it would commit a total of 800 billion won — injecting 500 billion won of taxpayer money into Hanjin KAL through a third-party share placement and acquiring 300 billion won worth of exchangeable bonds.

However, the state-run bank's participation in the deal fueled backlash from activist group Korea Corporate Government Improvement (KCGI), embroiled in a public feud with Korean Air since 2018.

KCGI created a third-party alliance including Cho Hyun-ah, the elder sister of Korean Air Chairman Cho Won-tae, and local construction company Bando Engineering & Construction Co. to put up a proxy fight against the incumbent management.

The alliance is the biggest shareholder of Hanjin KAL, holding a combined stake of 46.71%, higher than the 41.3% stake held by Chairman Cho and his supporters.

The KCGI stated that the airline restructuring could transpire through loans, issuing shares without voting rights, asset sales, rights offerings — methods that are not being considered by either the airline nor its creditors.

Instead, the restructuring is moving unreasonably fast without being mindful of existing shareholders, which is unacceptable, the activist group stressed.

The KCGI pointed out their proxy battle efforts have been dismantled by the KDB positioning itself as a white knight for Korean Air Chairman Cho as the state-run bank opted to invest in Hanjin KAL instead of injecting money directly into Korean Air to ensure Cho's management rights.

The activist group has filed an injunction against KDB’s plan arguing that the third-party share placement will dilute existing shareholdings while favoring family-appointed executives. 

Should the injunction be accepted, the deal will be scrapped and Asiana will fall under credit control once again.


GOVT AUTHORITIES DEFEND MERGER

Government authorities and relevant stakeholders have publicly defended the merger amid the ongoing dispute over KDB’s involvement in the airline restructuring.

In an interview with The Korea Economic Daily, KDB Chairman Lee Dong-gull said that "if the deal is scrapped, it won't just end with Asiana going bankrupt. It could threaten the footing of the airline industry."

According to Chairman Lee, the merger of the two airlines would be a first step toward the much-needed restructuring of the local aviation industry, reeling from the global COVID-19 pandemic.

He added that the merger will create an annual profit of 300 billion won.

FSC Chairman Eun Sung-soo speaks at a National Policy Committee meeting Nov. 27

During a National Policy Committee meeting on Nov. 27, Eun Sung-soo, the Chairman of the Financial Services Commission (FSC) stressed that there was no other option to save Asiana Airlines except the proposed merger, as there were no others willing to take on the beleaguered airline.

He explained that third-party share placement was selected instead of loans as there would be no pressure for interest payments alongside an effort to avert the company's debt ratio from rising further.

“We need collateral to ensure that management keeps their promises, and we can’t achieve that through debt. We need to become actual shareholders to hold them to their word,” Eun said.

The chairman added that the creditors decided to inject funds into Hanjin KAL, the parent company of Korean Air, because a holding company must hold over a 20% stake in its listed subsidiary under the country’s antitrust law.

If KDB were to directly invest in Korean Air then it would dilute Hanjin KAL’s shareholdings, making it difficult to maintain the legal threshold.


In response to criticism that the merger is a bit rushed amid an ongoing debate over Hanjin KAL’s management rights, Eun said that Asiana Airlines is in dire need of an immediate capital injection and there is no alternative but to speed up the process.

“Basically, we’ve hit a reality wall,” said Eun. “If the merger is delayed, Asiana Airlines’ debt ratio will surge and its credit rating will drop. It will be less damaging for us to prevent such a scenario from happening,” Eun stressed.

The court is expected to make its decision on the injunction before the capital increase, which is set for Dec. 2. Industry watchers are closely waiting to see what the future holds for the country's largest airline restructuring ever.

Write to Chang Jae Yoo and Sangeun Lucia Lee at yoocool@hankyung.com

Danbee Lee edited this article.

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