Court Likely to Rule on the Case This Week
Conflicts over a Korean Air-Asiana Airlines merger are continuing between Hanjin Group teaming up with the Korea Development Bank (KDB) and the alliance of activist private equity fund KCGI, former Korean Air vice president Cho Hyun-ah and Bando Engineering & Construction. The two sides are issuing press releases over and over to deny each other’s arguments. With the three-party alliance having applied for a court injunction to block new stock issuance and the merger hinging on whether the application will be accepted, both sides are trying to form as many friendly public opinions as possible.
The KDB reiterated in its unscheduled Nov. 26 press release that it is working on the merger in strict compliance with the three principles of corporate restructuring, that is, responsible roles of major shareholders, sharing of burden by interested parties and preparation of a normalization plan to guarantee business sustainability.
According to the state-run bank, Hanjin Group chairman Cho Won-tae provided 100 percent of his Hanjin KAL shares, worth 170 billion won in total, as collateral with regard to any violation of the investment agreement. At present, the chairman’ shares are worth a total of 273 billion won. The bank explained that the collateral can be disposed of and the chairman’s resignation is possible if its management assessment shows that the chairman fails to meet expectations related to the merger and business performance. The bank added that it would watch the process very closely.
The debt ratios of Korean Air and Asiana Airlines amounted to 737 percent and 2,432 percent at the end of the third quarter of this year, respectively. Besides, their lack of funds is estimated at 4.8 trillion won for next year. In other words, financing is urgently needed in both. Once Korean Air acquires Asiana Airlines, approximately 2.5 trillion won can be procured through paid-in capital increase.
“The early capital increase is possible because capital market participants are anticipating an increase in corporate value based on the business combination,” the KDB said, adding, “With COVID-19 still going on, it is not easy for Korean Air to carry out large-scale financing in the capital market on its own.”
“Corporate M&A is basically based on financing by an acquirer, not a major shareholder, and private property donation from Hanjin KAL major shareholders cannot be demanded with the company not subject to any restructuring,” it went on to say, continuing, “Normalization measures targeting distressed companies, such as capital reduction without refund, debt-equity swap by creditors and restructuring plan implementation, cannot be applied to the normal company of Korean Air.”
KCGI, which has been in conflict with the chairman over the rights to manage Hanjin Group, issued a counter-press release immediately. “The capital increase through third-party allocation of Hanjin KAL is rough, inappropriate and illegal, and we are humbly waiting for the ruling of the court,” the PEF said, adding, “Though belated, more opinions should be gathered from and publicly discussed with the general public as taxpayers, aviation industry experts and the interested parties including shareholders, executives and staff members so that the future restructuring of the industry can be conducted with concreteness.”
Especially, the PEF stressed that the KDB is threatening the court by claiming that the court’s injunction will lead to a canceled deal and Asiana Airlines’ bankruptcy.
Earlier, KCGI applied for the court injunction after KDB’s capital increase resolution in relation to Hanjin KAL. After the application, Hanjin Group said in a statement that the injunction will block Hanjin KAL’s capital increase and the merger. KDB Chairman Lee Dong-gull also remarked that Asiana Airlines may have to go under depending on the court ruling.
Rumors about Asiana Airlines’ Year-end Crisis
Rumors are circulating that Asiana Airlines will face a crisis next month with the court now handling the issue of Hanjin KAL’s capital increase through third-party allocation for Korean Air to acquire Asiana Airlines. This is because the court procedure will revolve around whether the financing was so urgent as to rule existing shareholders out of capital increase participation, that is, how much the likelihood of the bankruptcy will go up if Asiana Airlines fails to receive hundreds of billions of won by the end of this year.
The first hearing of the case took place on Nov. 25. The court is likely to reach a conclusion this week in that the payment due date for the capital increase is Dec. 2.
As mentioned above, the case is mainly about the access to new shares limited by Hanjin KAL to third parties and the legitimacy of the limitation against existing shareholders from the viewpoint of urgency in management. The Commercial Act of South Korea stipulates that a shareholder is entitled to receive new shares in proportion to the number of his or her shares. However, the same act also stipulates that a non-shareholder can receive a new share in accordance with the articles of association if it is to achieve a business purpose such as new technology introduction and financial structure improvement. The articles of association of Hanjin KAL also stipulate that third-party allocation is possible when financing is urgently needed.
Both Hanjin KAL and the KDB are stressing the urgency of the financing for Asiana Airlines, claiming that it must be completed within this year. They are planning to invest 1.8 trillion won in Asiana Airlines by the second half of next year by buying new shares and perpetual bonds and one-third of the investment is scheduled to be made this year in the form of down payment and perpetual bonds. “If this financing fails as a result of the injunction application, a fall in credit rating will inevitably occur with a series of events of default, capital impairment and administrative issue designation, license cancellation, and mass unemployment,” Hanjin KAL said.
However, some in the financial sector are questioning the necessity of the 600 billion won investment by the end of this year. Although a capital impairment of over 50 percent in the year-end business report leads to the designation and Asiana Airlines’ impairment was 50.2 percent at the end of the third quarter, the designation will become unlikely, in spite of the massive Q4 net loss, after the 3:1 capital reduction late this year. This is why it is said that the mentions about administrative issue designation and lower credit rating attributable to a failed capital increase are to instigate fear.
Especially, after the deal between Asiana Airlines and HDC Hyundai Development Company failed in September this year, the bank provided no less than 2.4 trillion won for the airline from the key industry stabilization fund. At that time, KDB Vice President Choi Dae-hyun stressed that no additional support would be necessary for a while in view of the size of the financial support.
“If the financing within this year is not necessary, the decision in question to receive funds only from the KDB with existing shareholders excluded will be hardly acceptable,” said a jurist who provided restructuring consulting for the bank in the past, adding, “If the court concludes that the financing within this year is unnecessary and accepts the injunction application, Hanjin Group chairman Cho Won-tae will be caught in a trap, proving himself that he put management right protection before business combination in the event of deal cancellation.”
IATA Positive about Korean Air-Asiana Airlines Merger
In the meantime, the International Air Transport Association (IATA) made a positive remark on the merger at its annual general meeting, the largest conference in the global aviation industry.
Hosted by Dutch airline KLM, the meeting took place from Nov. 23 to 25. The Asia-Pacific media session of the meeting covered the merger between Korean Air and Asiana Airlines.
In that session, IATA Asia-Pacific Regional Vice President Conrad Clifford said that Korean Air’s decision to acquire Asiana Airlines is a good example of how corporate survival and employment maintenance can be achieved at the same time with airlines across the world going through extreme difficulties.
The IATA also mentioned that the prolonged difficulties may lead to more mergers in the Asia-Pacific aviation industry with borders remaining closed and cross-border travel halted in the wake of COVID-19.
“Korean Air is expected to become a top-tier player in the global market by acquiring Asiana Airlines,” U.S. magazine Aviation Week commented, adding, “Especially, the merger is likely to boost their competitiveness in the air cargo transport industry with freight transport already accounting for a large portion of the business of both.”