As a "qualified" opinion of the audit reports can lead to a downgrade of Asiana Airlines’ credit rating from the current BBB- to BB+, it raises the possibility of cross default on debts related to maintenance of leased planes and asset-backed securities (ABS) and asset-backed short-term bonds (ABSTB). Cross default is a provision in a bond indenture or loan agreement that puts the borrower in default if the borrower defaults on another obligation.
The balance of Asiana Airlines’ ABS, corporate bonds and lease debts comes to 3.13 trillion won (US$2.76 billion), according to investment banking (IB) industry sources on March 25. Out of these, ABS, which is worth more than 1 trillion won (US$881.83 million), has a trigger clause that the company has to make an early payment when its credit rating is downgraded from BBB- to BB+, which is a speculative grade rating.
If debenture holders declares the trigger clause, Asiana Airlines has to make an early payment with cash alone with the company unable to refinance properly.
Asiana Airlines had only 295 billion won (US$260.14 million) worth of cashable assets as of the end of September last year. The market believes that the company’s cash flow will get worse and it is impossible to rule out an ABS default when ABS investors demand an early repayment.
The problem is that even 1.50 trillion won (US$1.32 billion) worth of lease debts has a special agreement for early repayment. Asiana Airlines’ financial lease debts has a clause that a default on a specific loan is considered the grounds for early payment of financial lease debts. In short, the aftermath of ABS default can increase the possibility of cross default of debts.
The trading of Asiana Airlines’ corporate bonds is blocked in the trading market. Korea Exchange said the company’s listed corporate bonds, the “Asiana Airline 86," would be delisted on April 8. The Asiana Airline 86 will also be suspended from trading until March 27.
The Korea Investors Service announced on the same day that the credit rating of Asiana Airlines’ ABS which is linked with the company’s credit rating has included in one of subjects to consider a downgrade.
Financial authorities have stepped in to calm down the growing concern about Asiana Airlines. Choi Jong-ku, chairman of the Financial Services Commission (FSC), said the situation would be settled without causing serious problems. “Asiana Airlines received the qualified opinion not because the company had problems with business capacity or cash flow but because of issues related to the financial statement evaluation method. Its ABS, which has become a concern, has been issued in security for accounts receivable so generally there is no problem with repayment if the company normally runs business.”