Restructuring of Hanjin Group
The Financial Supervisory Service (FSC) has reportedly asked Hanjin group to lower its debt ratio by selling a major portion of jet aircraft owned by its affiliate Korean Air. This is the first action taken by the Korean financial authority after announcing that it would closely monitor the Korean conglomerate.
According to financial industry sources, the Financial Supervisory Service and Hanjin’s main creditor KDB Bank have been negotiating with Hanjin to reduce Korean Air’s debt ratio, which is 750%.
At the moment, Korean Air owns 147 jets, of which only 14 are on lease. The rest owned by Korean Air are based on a leaseback deal, which generally occurs in the loan capital market.
General airline industry business requires a continuous acquisition of new jets, resulting in additional loans.
In March this year, Korean Air’s loans amounted to 14.7 trillion won (US$13.8 billion), up 3 trillion won (US$2.8 billion) from the end of 2010, when it signed a financial restructuring agreement with its creditors. Moreover, Korean Air has a plan to buy a total of 12 aircraft, including a Boeing B787 Dreamliner by 2018 through investing 4 trillion won (US$3.7 billion).
Hanjin is, however, against the sale of the jets, a core business asset of any airline business. It argues that it is necessary to keep them in case of booming times, even if the airline suffers from increasing competition from low-priced competitors and a decreasing number of passengers. The conglomerate revealed its will to lower the debt ratio through leasebacks rather than selling out the aircraft.