Korean Air plans disposals to cut debts

Korean Air, South Korea's flagship carrier, and its affiliate Hanjin Shipping on Thursday announced plans to raise a total of Won5tn through asset sales to repay mounting debts.

The two companies are struggling with deteriorating cash flow and heavy losses because of weak travel demand and overcapacity in the shipping industry. Korean Air suffered a loss in the first nine months of this year while Hanjin Shipping posted a loss in each of the past 10 quarters.

Their financial performance has come under closer scrutiny after a string of bankruptcies among second-tier chaebol groups including STX, Tongyang and Woongjin. Financial regulators have asked creditors to strengthen their monitoring of industrial companies, following the spike in recent corporate failures.

Korean Air said it will raise Won3.5tn to pay back debts with its gross debt outweighing its equity by 8 to one. It plans to sell 30m shares in oil refiner S-Oil for Won2.2tn and to dispose of 13 aircrafts for Won250bn. It plans to raise the remainder by selling property and other financial assets.

The company's debt increased sharply as it ordered $3.7bn of Boeing aircraft to modernise its fleet. It is selling ageing aircraft such as Boeing's 747-400 and 777-200. Korean Air has about Won3.46tn of debt due next year.

The airline said it will provide Hanjin Shipping with Won100bn in additional financial support, after offering Won150bn in October to ease a liquidity crunch at the shipping affiliate. The additional support will be made on condition that local banks offer 3-year loans worth about Won300bn to Hanjin. Korean Air will also participate in Hanjin's rights offering worth Won400bn in the first half of next year.

The news pushed Korean Air shares 3.2 per cent lower to Won28,400 on Thursday after dropping 47 per cent so far this year. But Hanjin shares rose 1.4 per cent while S-Oil shares fell 1.1 per cent.

Hanjin Shipping plans to raise Won1.5tn by selling assets including port terminals and dry bulk-dedicated business. It also aims to get loans worth Won444bn from creditors. For restructuring it plans to dispose of old ships and shut down unprofitable routes. Through such restructuring efforts, the shipping company aims to pay back Won1.25tn of debt next year and Won1.08tn in 2015. 

The company's long-term outlook appears gloomy because overcapacity is likely to plague the global shipping industry for at least another two years. Hanjin's chief executive Kim Young-min recently stepped down after the company reported heavy losses for the past thee years. 

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