What financing terms and credit considerations will Korean Air face for acquiring 103 jets amid its Asiana integration?
Financing structure:
Korean Air is expected to fund the 103‑aircraft program with a blended package of cash, senior unsecured debt and operating‑lease financing arranged through Boeing Capital and a consortium of Korean banks. Preliminary terms disclosed in the announcement suggest a 10‑year amortizing loan tranche at a coupon of 3.0 %‑3.5 % above the Korean 10‑year government yield, with the balance covered by sale‑and‑lease‑back arrangements that spread payments over the aircraft’s useful life (15–20 years). Because the deal coincides with the final integration of Asiana, a portion of the financing is being under‑written by the Korean Export‑Credit Agency (KEXIM), which typically offers up to 30 % of the total exposure at a subsidised rate (≈2 % above KEXIM’s benchmark). The airline will also tap its existing revolving credit facility (≈$4 bn) for working‑capital needs and to smooth cash‑flow during the integration phase.
Credit considerations:
1. Leverage impact – The new debt will lift Korean Air’s net‑debt‑to‑EBITDA from ~2.2× to roughly 2.7×‑3.0×, a level still within the covenant caps of its current senior notes but high enough to draw tighter monitoring from rating agencies.
2. Rating outlook – S&P, Moody’s and Fitch have flagged the Asiana merger as a “moderate‑risk” event; the added aircraft financing could shift the outlook from stable to negative unless Korean Air delivers the projected 5‑6 % revenue synergies and maintains an interest‑coverage ratio above 3.0×.
3. Currency risk – Most of the loan and lease payments will be denominated in USD, while a sizable share of Korean Air’s cash flow remains in KRW. The airline will likely hedge a minimum of 70 % of the exposure using forward contracts, but any sustained KRW depreciation could erode net margins.
4. Government support – The Korean government has signalled a willingness to provide a guarantee line for up to $1 bn of the debt, which should mitigate spread widening on the airline’s bonds and keep borrowing costs in line with peers.
Trading implications:
The financing package is priced at a mid‑single‑digit spread over sovereign yields, implying that Korean Air’s senior bond yields will likely tighten 10‑15 bps as the market digests the guaranteed, ECA‑backed portion. For equity investors, the deal adds ~$12 bn of capital expenditure but is offset by a clear modernization narrative and the potential to capture Asiana’s slot‑rich network, supporting a 2‑3 % upside target on the stock if integration synergies materialize and credit spreads remain stable. Traders should watch: (i) the final term sheet for any covenant tightening, (ii) KRW/USD moves that could affect cash‑flow hedging costs, and (iii) rating agency updates in the next 30‑45 days—any downgrade would likely trigger short‑term bond sell‑offs and pressure the equity, while a stable outlook could fuel a rally in both the airline’s debt and stock.