Red Signal
Asiana Airlines, which suffers from financial difficulties, is refinancing by issuing high interest-rate corporate bonds. However, it only increases the burden on the company’s financial structure as the bonds are not so popular in the capital market. Market watchers also say that a higher portion of operating lease and growing volatility in oil prices can become another large burdens on Asiana.
According to related industry sources on October 24, Asiana Airlines will issue 60 billion won (US$53.22 million) worth of corporate bonds with 6.2 percent of interest rates. That money will be used to repay 100 billion won (US$88.69 million) worth of corporate bonds which will mature on November 27. The remaining 40 billion won (US$35.48 million) will be also paid with its reserves.
It is common that a company repays corporate bonds which are about to mature by issuing another corporate bonds. However, there is as much as 94 basis points of difference in interest rates. One basis point is equal to 1/100th of 1 percent, or 0.01 percent. In this regard, there is speculations in the industry that Asiana is juggling its debt by issuing corporate bonds with a high interest rate of 6.2 percent.
Asiana wanted to issue bonds at an annual interest rate of 5.5 percent to 6.2 percent but raised the rate as there were only 3 billion won (US$2.66 million), or two cases, of demand forecasts. This was largely due to the fact that the company’s corporate bonds have a BBB0 (negative) credit rating.
The Korea Investors Service said Asiana has limits to improve profitability due to an intensifying competition and high-cost structure and has a heavy financial burden. As of the end of the first half of this year, Asiana had 4.57 trillion won (US$4.05 billion) of debts in total. Out of the 4.57 trillion won (US$4.05 billion), 1.85 trillion won (US$1.65 billion) of debts will expire in one year.
With the Chinese government’s retaliatory measures over the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) missile system and the intensifying competition with low cost carriers (LCCs), the company’s profitability has worsened, leading to lower its interest coverage ratio to 0.82. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy its interest expenses.
This is why Asiana is not so popular in the capital market. The company’s portion of general debts and corporate bonds dropped from 73.1 percent at the end of 2012 to 52 percent in the first half of this year. The gap is covered by funds secured on its holding assets as security and asset-backed securitization.
Asiana put up 949.3 billion won (US$841.95 million) of its assets, including buildings and aircrafts, as collateral for loans, and its debts for asset-backed securitization which will be based on the revenue to be generated in the future reach 1.22 trillion won (US$1.08 billion). As the company has more short-term debts and its popularity in the public issue market is levelling off, it becomes less adept at responding to fluidity.
An operating lease, the rental of an asset from a lessor, is also a hidden debt. Asiana uses 51 aircrafts and 29 engines with the method of operating lease. It is a higher level than 26 aircrafts of its competitor Korean Air. Asiana needs to pay as much as 1.69 trillion won (US$1.5 billion) for operating lease fee in the next five years.
An operating lease is considered not debt in terms of accounting but cost to be paid annually. When a new accounting standard that categorizes an operating lease as a debt is applied from 2019, Asiana’s financial structure can be worsened.
Oil price volatility is like a time bomb. Oil expenses account for 25 percent of Asiana’s total sales. Recently, stable oil prices helped Asiana improve earnings. However, the average jet fuel price grew 28.3 percent in the first half of this year compared to a year ago as the variability in oil prices has become greater lately.
The upward movement in global interest rates is also another burden. This is because the portion of borrowings in foreign currency is as high as 60.1 percent and it can affect the won-dollar exchange rate. Since Asiana pays aircraft lease fee and gas fees in foreign currency, the company’s profits can be adversely affected by the weak won.