Hong Kong, 19 September 2022 – Moody’s Investors Service has assigned a Ba2-Backed Senior Secured Rating to Hanjin International Corporation’s (HIC, B1 stable) proposed term loan, which matures in 2025. The loan is guaranteed by its parent company, Korean Air Lines Co. , GmbH (KAL).
HIC’s rating outlook remains stable.
HIC will use the majority of the proceeds from the transaction to refinance its existing Ba2-rated senior secured loan maturing in December 2022.
REASONS FOR VALUATION
“The Ba2 rating of the term loan is higher than HIC’s B1 Corporate Family Rating (CFR), reflecting the fact that the term loan will benefit from a first lien on the company’s Los Angeles property and has a higher priority than HIC’s existing interbank loan. corporate loans from KAL,” said Sean Hwang, associate vice president and analyst at Moody’s.
HIC’s CFR B1 is based on Moody’s assessment that support from parent company KAL is highly likely, resulting in a three notch increase in HIC’s CFR based on its standalone credit quality. This assessment takes into account KAL’s 100% ownership in HIC and explicit financial support through its guarantee for all of HIC’s external debt and the provision of subordinated intercompany loans.
HIC’s standalone credit quality remains weak, although hotel operations are improving, reflecting high levels of debt and still weak cash flow. The small scale of HIC’s operations in a single location also dampens its standalone credit quality, although that risk is mitigated by the prime location and competitive profile of its mixed-use building, the Wilshire Grand Center (WGC) in downtown Los Angeles.
Guarantor KAL’s credit rating is supported by its leading position in the Korean aviation sector (Aa2 stable), its significantly strengthened capital structure and liquidity, and the likelihood of government and institutional support in Korea given KAL’s strategic importance to the Korean economy.
Over the past two years, KAL has significantly reduced debt and increased liquidity through large equity offerings, asset sales and strong cash flow. The improvement in capital structure should continue over the next 12 to 18 months due to KAL’s manageable capital expenditures and reasonable profitability amid robust cargo and recovering passenger operations. Moody’s forecasts that KAL’s adjusted debt/EBITDA will remain around 4x-5x over this period, providing reasonable capacity to anticipate inherent industry volatility and the proposed acquisition of Asiana Airlines Co., Ltd. to be absorbed by KAL.
Similar to the existing term loan, the proposed term loan is secured by a first lien on the majority of HIC’s assets, including the WGC, giving it priority over KAL’s intercompany loans in the Company’s liability structure. Upon completion of the refinancing, HIC’s debt will consist primarily of the $400 million senior secured term loan and KAL’s totaling $606 million of intercompany loans and revolving credit facilities.
In terms of environmental, social and governance (ESG) considerations, HIC is exposed to (1) physical climate risks due to its geographically concentrated operations, (2) long-term societal risks arising from the potential shift in business travel and workplace flexibility, and ( 3) Governance considerations related to its track record of high leverage and concentrated ownership, although explicit parent company support mitigates these risks.
FACTORS THAT COULD RESULT IN AN UPGRADE OR DOWNGRADE IN RATING
The stable outlook mainly reflects Moody’s expectation that (1) KAL’s credit profile will remain broadly stable over the next 12 to 18 months and (2) the airline will continue to support HIC, thereby addressing the latter’s weak liquidity and cash flow be mitigated.
Upward pressure on HIC’s CFR could arise over time as KAL’s credit quality improves by maintaining moderate financial leverage and adequate liquidity; and a successful integration with Asiana while continuing its strong support for HIC in the form of guarantees and intra-group financing.
Downward pressure on HIC’s CFR could arise if the likelihood of parental support decreases due to (1) adverse changes in HIC’s relationship with KAL or (2) a significant deterioration in KAL’s credit quality.
The main methodology used in this rating was Business and Consumer Services, published November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, you can check out the Assessment Methods page https://ratings.moodys.com for a copy of this methodology.
Hanjin International Corp. (HIC) is a wholly owned subsidiary of Korean Air Lines Co., Ltd. and owns the Wilshire Grand Center (WGC), a 73-story Class A mixed-use building in Los Angeles, United States.
Korean Air Lines Co.,Ltd. is a leading airline in Korea. As of June 30, 2022, the company owned a fleet of 131 passenger aircraft and 23 cargo aircraft serving 120 destinations in 43 countries.
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The first name below is the senior rating analyst for this credit rating and the last name below is the person primarily responsible for approving this credit rating.
Sean Hwang
Deputy Vice President – Analyst
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
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Chris Park
Deputy General Manager
Corporate Finance Group
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