KAL, Asiana raise cash on asset-based notes

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KAL, Asiana raise cash on asset-based notes

Korean Air Lines and Asiana Airlines are favoring notes backed by ticket sales as soaring debt levels boost the cost of traditional fund-raising.

Korean Air, the national carrier whose senior unsecured credit rating was cut to A- by Korea Ratings Corp. in November, is marketing 40 billion yen ($393 million) of floating-rate notes secured by ticket receivables in Japan. Asiana, operator of the Boeing 777 jet that crashed in San Francisco earlier this year, has raised 900 billion won ($851 million) via similar asset-backed notes since Dec. 31. Korean airlines’ debt ratios have worsened as they’ve borrowed to buy more planes, modernize their existing fleets and roll out international advertising campaigns. The seat-sale securities allow access to cheaper funding because state-owned Korea Development Bank provides unconditional credit facilities which would cover any shortfall in the revenue needed to make payments on the bonds.

“It’s a different source of funding these companies can try,” said Elaine Ng, a Hong Kong-based senior analyst at Moody’s Investors Service. “Since they have all these receivables coming in, and since these kinds of asset-backed transactions have been accepted by the market, this is a good alternative financing solution.”

Moody’s has assigned a provisional Aa3 rating to Korean Air’s planned yen bonds, its fourth-highest investment-grade. That matches Korea Development Bank’s own ranking from the ratings company.

“The rating on the notes is primarily based on the credit facility and the interest-rate swap to be provided by KDB,” Moody’s said. The yen-denominated ticket receivables are generated from the sale of passenger tickets on the routes Korean Air flies from Japan, according to Moody’s.

Arrivals into Korea from Japan have dropped every month since August 2012, according to data from the Korea Tourism Organization. Some 30,000 people visited Korea from Japan over the past 12 months, and a return ticket costs about 773,300 won.

Korean Air’s debt-to-equity ratio was 749.7 percent as of Sept. 30, up from 691 percent on Dec. 31, according to the company’s financial filings. Asiana had a 619.4 percent ratio as of Sept. 30 versus 505.7 percent at the end of last year. Korean Air, which according to regulatory filings reported an operating loss of 37.38 billion won for the January to September period, in October agreed to buy $3.7 billion of aircraft from Boeing to upgrade its fleet. It faces 1.44 trillion won of maturing bonds and loans next year, according to data compiled by Bloomberg, and sold 210 billion won of hybrid securities in June to lower its debt ratio. Its 30 billion won of three-year ABS notes sold in April pay a coupon of 3.09 percent versus an average 3.27 percent for similar-maturity non-ABS notes.

“KAL has been aggressively trying to buy new aircraft in order to modernize its fleet since 2010, adding a burden to its debt ratio,” said Kim Min-ji, analyst at ETrade Korea. “For accounting purposes, the company mainly opts for financing leases when buying planes. This has made its debt ratio higher.”

Asiana Airlines’ operating profit fell 93.6 percent to 12.4 billion won for the January to September period. Asiana’s senior unsecured debt is rated BBB+ by Korea Ratings, an affiliate of Fitch Ratings.

Passenger traffic at Seoul’s Incheon Airport rose 6.9 percent in the first 10 months of the year versus the same period of 2012 while cargo traffic fell 0.4 percent, data from Incheon International Airport show.

“International demand at all Korean airports has been growing rapidly despite the global economic slowdown,” said Yun Hee-do, an analyst at Korea Investment and Securities. “However Korean Air’s earnings failed to meet expectations because it’s the low-cost carriers driving growth.”

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