Asiana Airlines’ potential credit downgrading is raising investor concerns about its financial health and possible liquidity crunch, which might trigger the early repayment of 1.7 trillion won ($1.5 billion) worth asset-backed securities to investors.
An aircraft of Asiana Airlines on standby at Gimpo International Airport
This comes after Asiana’s external auditor gave a “qualified” opinion citing lack of acceptable financial records, which has resulted in a temporary suspension of stock trading and an imminent corporate bond delisting.
Samil PricewaterhouseCoopers cited the lack of information surrounding provisional debt related to the maintenance of leased aircraft; booking and calculation of deferred mileage-related gains; recoverable amounts of tangible and intangible assets that showed signs of impairment; fair valuation of affiliated stocks; and consolidation of Air Busan.
Asiana has also failed to sign off the 2018 financial statement by the deadline of March 21 -- a week ahead of its shareholders meeting on March 29.
The airliner’s corporate bonds are now facing imminent delisting on April 8, just ahead of its maturity date on April 25.
On March 22, credit ratings agencies NICE Investors Service and Korea Investors Service put the company on review for possible further downgrades of its long-term and short-term credit currently rated BBB-. This means the firm’s credit ratings are likely to climb down within three months.
Market analysts on March 25 said a downgrading of Korea’s second-largest airline company is expected to increase the debt pressure.
According to its agreement with ABS investors, once the rating is revised downward, its revenue from airfares and the maintenance costs will be immediately used to repay loans extended by investors in ABS, which collateralize receivables of Asiana and its low-cost carrier subsidiaries Air Seoul and Air Busan.
“Until the leverage from ABS’ are fully repaid, revenues will deviate from (Asiana Airlines),” Lee Han-joon, an analyst at KTB Investment & Securities, wrote in a note. “For Asiana, ABS is the sole means to refinancing existing debt ... regardless of its credit downgrading, pressure from the company’s liquidity crunch will escalate if it has trouble issuing new ABS’.”
Of the 3.4 trillion won leverage, Asiana is obliged to repay some 960 billion won this year. In addition to this, some 1.2 trillion won leverage into Asiana and 420 billion won into Air Seoul and Air Busan will be subject to early repayment in case of a credit downgrading, Lee added.
“Uncertainties surrounding Asiana’s financial health are now resurfacing,” said Kim Young-ho, an analyst at Samsung Securities in a report. “Clear-sightedness in company performance and trust in accounting procedures needs to be enhanced.”
According to the Korea Exchange on March 26, a batch of the airline’s corporate bonds worth 60 billion won, called “Asiana Airlines 86,” are suspended from transactions on March 25-27 and will resume trading until its final trading day on April 5. Stock trading will be suspended until March 25 and resume the next day.
By Son Ji-hyoung (firstname.lastname@example.org)