Korean Air ABS set to fly

SG mandated for $300 million future flow deal.

Korean Air Lines (KAL), Korea's largest air carrier and part of the Hanjin Group, is set to make its first foray into the asset-backed securitization (ABS) market with a deal worth up to $300 million, say bankers familiar with the transaction. Although the bank declined to comment, it is widely known that SG has been selected as arranger and bookrunner, with an as yet unknown domestic Korean house employed in a supporting role.

The deal could be launched next month but may be held over until early next year depending on prevailing market conditions, bankers add.

KAL's offering will be backed by future air ticket receivables, and will be the first such deal from ex-Japan Asia since its closest Korean competitor, Asiana Airlines, issued a $65 million deal in December 2000.

Where KAL looks set to differ from Asiana lies in the fact that its deal seems certain to feature an unconditional guarantee from the Korea Development Bank (KDB). This will bring the deal up to the sovereign level of A3/A- by Moody's and S&P.

KDB was involved in the same capacity on the other cross-border deal that SG arranged this year, a $110 million securitization backed by cashflows arising from seven contracts between Korea Line Corp, a shipping company, and steel powerhouse Posco. The deal, which has a legal maturity of five years and expected average life of 2.6 years, was rated A3 purely because of the KDB guarantee and priced at 80bp over three month Libor.

It is unlikely KAL would be able to get a deal away on a standalone basis, particularly given the flight-to-quality by investors in the credit markets in recent months. And given that the Asiana transaction, originally rated BB by Fitch, was downgraded to B+ and remains on rating watch negative because of the prevailing business environment for Korean air carriers, a KDB or equivalent rated guarantee appears unavoidable.

That seems the consensus of bankers not involved in the deal. "The Korean market has come a long way, but international investors would not be ready for this without some external guarantee," says one. "With an unwrapped future flow deal tied to offshore ticket receivables, investors are highly tied to the credit risk of the issuer. As things stand, it would be very difficult to sell without the KDB guarantee."

The KAL mandate ensures that SG's ABS team will be kept very busy in the next couple of months. The bank is also tidying up the loose ends on what should be the first completed securitization from Taiwan. Since January, SG has been working with the Industrial Bank of Taiwan (IBT) on a collateralized loan obligation for between NT$3 billion ($86.8 million) and NT$4 billion.

SG and IBT are due to submit the deal for approval from regulators at the end of this month or early December, and have targeted the end of December as a closing date. However, because Taiwan only passed its securitization laws in July and August and this would be a first-time transaction, bankers close to the deal realize that the approval process may take longer than anticipated. In this event, January may be a more likely closing date.

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