Park Jae-hyuk is a seasoned journalist who has provided comprehensive coverage of South Korea's corporate dynamics, economic policies, industry challenges and the global positioning of Korean companies. Based on the articles he has written since joining The Korea Times in 2016, his investigative approach has helped readers understand corporate governance, economic trends and business strategies shaping South Korea’s economy.
Korean Air facing liquidity crunch
Korean Air Chairman Cho Yang-ho
By Park Jae-hyuk
Cho Hyun-ah, Korean Air chairman's oldest daughter
Cho Hyun-min, Korean Air chairman's youngest daughter
Investors turn away from scandalous air carrier
By Park Jae-hyuk
Korean Air is expected to grapple with a high debt-to-equity ratio in the near future, as a series of owner family-centric scandals would freeze investor sentiment of the company in the stock market.
On Sunday, stock market analysts say its debt-to-equity ratio may increase to 700 percent by this year from the 542 percent last year, because of its ways of attracting capital from the market.
The one thing that makes the current situation even worse for the national carrier is that its tarnished image is expected to lead to additional difficulties keeping its net cash flow stable.
Over the past three years, Korean Air attracted 1 trillion won ($928 million) through the increases of its capital stocks in 2015 and 2017, as well as obtaining an additional $600 million through the issues of hybrid bonds in the same years. A hybrid bond is a security that combines elements of debt securities and equity securities.
If the hybrid bonds are converted into debts, the debt-to-equity ratio will reach 700 percent, offsetting the company's efforts last year to reduce the ratio to 542 percent from 1,274 percent in 2016, said analysts. Korean Air had 14 trillion won in total debt by the end of the first quarter of this year, though it generates about 2 trillion won a year in cash from operations. Its corporate debt scheduled to mature by the end of this year amounts to 4 trillion won, according to its financial sheets.
Korean Air, therefore, is considered a company needing to regularly raise funds from the market, according to analysts.
Against this backdrop, foreign and institutional investors' continued unloading their holdings in Korean Air following the group's heiress Cho Hyun-min's alleged assault. This seems to have worsened the company's financial condition, weighing on shareholders and investors.
Observers expect its stock price to go down further if the police and prosecutors continue to crack down on the Cho family.
“The deterioration of investment following the governance risk is inevitable,” Samsung Securities analyst Kim Young-ho said. “However, it is too early to say the latest scandal will damage Korean Air's fundamentals.”
Considering the incumbent administration's sensitivity to public sentiment and approval, some industry officials anticipate the financial supervisors' regulations on Korean Air's fundraising or state-run institutional investors' exodus in the long run.
The company's minority shareholders recently urged the National Pension Service (NPS), the second-largest shareholder of Korean Air, to actively exercise its rights to stop the owner family and pull up the company's corporate value.
Minister of Health and Welfare Park Neung-hoo also said he regards the scandal as a factor worsening the profitability of the NPS in the long run.
Officials and analysts warned that if Korean Air's stock price continues to drop, the pension fund may reduce its investment in Korean Air to secure its profitability, considering the pension fund abandoned its status as a major shareholder of Asiana Airlines two years ago over the country's No. 2 air carrier's falling financial stability following the reform of Kumho Asiana Group.
Analysts cited Korean Air's poor performance in the first quarter as another reason for the company's possible difficulties in securing cash flow.
“The poor performance in the first quarter and the recent governance risk have influenced negatively on investor sentiment,” Korea Investment & Securities analyst Choi Go-woon said in a report.
FN Guide, a financial data tracker, estimated Korean Air's operating profits in the first quarter at 179.6 billion won, down 6.21 percent from a year earlier, while Asiana Airlines is expected to post 64.3 billion won in operating profits, up 144.4 percent year-on-year. The decrease of Korean Air's operating profits has been attributed to payment of 10 percent safety incentives to all employees and losses from the air carrier's hotel in Los Angeles, said the tracker.
“The demand for Korean Air's international flights were enough in the first quarter, but the company will not achieve better performance than last year, due to several factors that increased its costs,” Shinyoung Securities analyst Um Kyung-a said.
Although the recent appreciation of the Korean won following pressure from the United States has been considered as a factor that can decrease Korean Air's debt-to-equity ratio, observers have regarded this as a short-term effect, saying the rise of oil prices may raise the interest and exchange rates.
Still, the domestic securities firms have yet to discount the target price of Korean Air, recommending investors buy the air carrier's stock.
They explained they feel difficulty in measuring possible damages from the Cho family's misdeeds, but investors criticized the brokerages for avoiding their responsibilities to favor chaebol owners.