Government Support with Strings Attached
The South Korean government is planning to provide 1.2 trillion won for Korean Air on condition of profit sharing and experts point out that this can become a risk factor related to the airline’s control in the future. One-fourth of the financial support will be based on perpetual bonds subject to stock conversion, and it is said that the control can be threatened in the event of stock sale.
At present, Korea Development Bank, the Export-Import Bank of Korea and Korean Air are in negotiations on details of the perpetual bonds, including the airline’s buyback in the event of conversion. On April 25, the two banks released their financial support plan and said that 200 billion won would be pure borrowing and 700 billion won would be asset-backed securities related to air cargo transport.
At that time, Korea Development Bank mentioned profit sharing to be carried out after the airline’s business goes back to normal. What it mentioned is somewhat different from the typical definition of profit sharing. “It means a potential margin or dividend profit based on perpetual bond-to-stock conversion,” the bank said.
This can be burdensome in terms of corporate control on the part of Korean Air, due to the possibility of sale, although the banks are planning to exercise no voting rights with regard to stocks converted from the bonds. The banks can conduct the conversion after June and their shareholding in the company can reach 10.8 percent through the conversion. Then, the South Korean government’s shareholding in it will top 20 percent given that the National Pension Service currently owns 9.98 percent of the airline.
“The post-normalization stock sale is likely to be after-hours block trading and then Korean Air's corporate control may be shaken depending on who buys the stocks,” said an industry insider, adding, “Korean Air would face corporate control disputes, similarly to Hanjin KAL, if the other party was hostile to Korean Air.” This is why the airline is in negotiations on buyback terms and the like. Hanjin KAL, the largest shareholder in Korean Air, owned 33.34 percent of common stocks as of the end of March. Meanwhile, Korean Air's repayments scheduled within this year amount to 3.75 trillion won or so in total.
The repayments are divided into 2.2 trillion won in borrowings, 900 billion won in corporate bonds, 600 billion won in ABS, etc. Korean Air must additionally prepare 2.5 trillion won, and it is said that the company is likely to conduct a capital increase of up to one trillion won in July and sell its land and buildings in Seoul and Jeju to prepare the money by late September.