Speculation is growing over the motive by Korea Development Bank (KDB) for buying new shares from Hanjin KAL to back its acquisition of Asiana Airlines through Korean Air, despite a predictable backlash from the holding firm’s largest shareholder group.

KDB approached Hanjin KAL, the holding company of Hanjin Group and parent of Korean Air, about the sale two months ago, industry sources said. They had reportedly considered several options for the acquisition relating to its financing and whether Hanjin KAL would acquire Asiana Airlines itself or manage the deal through Korean Air.

KDB knows that there is a family feud for control of Hanjin Group. Its decision to become the third-largest shareholder in Hanjin KAL could be seen as a sign that the state-run lender is on the side of the group’s chairman Cho Won-tae and his allies, who are battling with a three-way coalition consisting of his sister and former Korean Air vice president Cho Hyun-ah, activist fund KCGI and Bando Engineering & Construction. The coalition currently holds the largest stake of 46.71% in the holding company.

The most straightforward way for Hanjin Group to buy Asiana Airlines would be to let Korean Air raise funds from KDB and use them for the acquisition. But this could mean a new equity issue by Korean Air, which would dilute Hanjin KAL’s ownership of the carrier. That appears to be the reason why the lender decided to provide capital to Hanjin KAL for the purchase of Asiana Airlines, rather than Korean Air.

Debt financing from KDB could be available, but both KDB and Hanjin KAL would have not preferred this option given Korean Air’s high debt ratio, now more than 1000%.

“We made that decision after considering the importance of Korean Air to Hanjin KAL, whose earnings primarily come from dividends paid by the airline,” KDB chairman Lee Dong-gull said during an online press conference on Monday (November 16).

“We had considered providing loans to Hanjin KAL but concluded that this could add to the holding company’s financial distress and chose to make an equity investment. As a shareholder in the company, we will monitor management to ensure they work in the best interests of shareholders.”

However, the three-party alliance criticized Lee’s remarks, arguing that “KDB’s decision to provide an equity investment to Hanjin KAL, whose debt ratio is only 108%, means its intention is to support the current management” of the company.

EXCHANGEABLE BONDS VS CONVERTIBLE BONDS

Apart from a 500 billion won ($452 million) equity investment, KDB will also invest 300 billion won in exchangeable bonds issued by Hanjin KAL. KDB has rarely used this type of hybrid debt when providing funds to distressed companies. The reason it chose exchangeable bonds this time is likely due to the deal structure, observers said.

“Exchangeable bonds can be converted into shares of a company other than the issuing company, usually a subsidiary, while convertible bonds, which KDB has commonly invested in, can be converted into shares of the underlying issuer,” an industry insider said. “KDB will be able to hold an equity interest in Korean Air by exercising its right in the future. If it had injected money into Korean Air directly, it would probably have chosen convertible bonds.”

An official at a credit rating agency added: “The deal structure signals KDB’s intention to support chairman Cho Won-tae. Investing in exchangeable bonds would likely help KDB reduce investment risk.” (Reporting by Hee-yeon Han and Byung-yoon Kim)

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