The stock price of Jeju Air, the number one low-cost carrier (LCC) in South Korea, has fallen to its lowest level ever, increasing the burden on its parent company, Aekyung Group. Investors in exchange bonds (EB) issued with Jeju Air's equity as the underlying asset have already begun their second principal recovery. There is a high possibility they will also demand to buy back the remaining amount.

Additionally, the stock collateral loan borrowed using Jeju Air's equity is also at risk of forced liquidation. Aekyung Group, the holding company, owns 50.37% of Jeju Air's stock.

At Jeonnam Muan International Airport, as an incident involving Jeju Air passenger aircraft occurs, on Nov. 30, a Jeju Air plane is preparing for takeoff at the domestic terminal of Gimpo International Airport in Gangseo-gu, Seoul. /Courtesy of News1

According to the Korea Exchange on the 30th, Jeju Air's stock price hit 6,920 won, the lowest level since its listing on the securities market in December 2015. This year, Jeju Air's stock price has been on a downward trend due to concerns over poor performance, compounded by a frozen stock market. The stock price plummeted significantly on the last trading day of the year, following a tragedy on the 29th.

However, as Jeju Air's stock price dims, its parent company, Aekyung Group, finds itself in a more difficult situation. This is because it has to repay the funds raised using Jeju Air's shares. In September 2022, Aekyung Group issued 130 billion won worth of EBs to support Jeju Air, which was facing financial difficulties due to the impact of COVID-19.

At that time, the decision was deemed a 'brilliant move' as it allowed for funding at lower interest rates than the market. Aekyung Group pledged 8,305,648 shares (10.3%) of its subsidiary Jeju Air as collateral, which was purchased by Korea Investment, Daishin, and Meritz Securities. The maturity is set for September 2027, with an interest rate of 3%. Aekyung Group reinvested about 1.098 billion won, which is approximately 85% of the cash secured from this deal, back into Jeju Air's capital increase.

On Nov. 30, Ko Jun, CEO of AK Holdings (front), and Chae Hyeongseok, Vice Chairman of Aekyung Group (back), along with others related to the Jeju Air passenger aircraft incident, are leaving after paying their respects at the joint altar set up for the victims in Muan, Jeonnam. /Courtesy of News1

The issue arose when the timing for investors to exercise their early redemption requests (put options) arrived. Investors expected that Jeju Air's stock price would rebound once COVID-19 was over. However, as the stock price remained at only half of the exchange price (15,050 won), they judged it would be difficult to gain capital gains and began to seek principal recovery.

As investors forecast a negative outlook for future stock prices, Aekyung Group's burden is expected to increase. This is because investors can demand repayment every three months. Indeed, on the first exercise date for the put option, September 6, Aekyung Group paid 4.13 billion won plus about 6.15% interest, totaling 4.3844 billion won. Subsequently, on the second exercise date for the put option, November 6, Aekyung Group paid an additional 534.78 million won, including about 6.96% interest, on a principal of 500 million won.

Moreover, Aekyung Group has executed stock collateral loans against a significant portion of Jeju Air's equity. This was to support financially struggling subsidiaries such as AK Plaza. According to the Financial Supervisory Service's electronic disclosure system, as of the 9th, Aekyung Group borrowed a total of 154 billion won against approximately 26.7 million shares, accounting for 53.6% of its ownership in Jeju Air.

Concerns have emerged in the financial investment industry that Aekyung Group may face a crisis of forced sale of its stocks. The collateral maintenance ratio for loans is between 120% and 180%. Some loan contracts have already dipped below the collateral maintenance ratio. For instance, the collateral maintenance ratio for a 50 billion won loan taken out in February against 9.7% of Jeju Air's equity with KB Securities is 180%. Based on the stock price during the trading day (about 7,000 won), the valuation of the stocks under collateral is about 54 billion won, resulting in a collateral ratio of only 110%. In this situation, if Jeju Air's stock price continues to decline and the borrower requests additional margin, they will have to provide more collateral or partially repay existing stock loans.

Graphic=Jung Seohee

As of the end of September 2024, Aekyung Group’s separate cash and cash-equivalent assets amount to only about 2.6 billion won. This is a 94% decrease from the 49 billion won at the end of last year. In contrast, short-term borrowings that must be repaid within a year have reached 323.5 billion won. The company's liquidity ratio has dropped from 55.28% at the end of last year to 27.29%. Meanwhile, net borrowings have increased from 69.2% to 78.7% during the same period. Typically, corporations consider a net borrowing ratio of less than 20% to be adequate.

An industry source said, 'Jeju Air is in urgent need of improving its financial structure, which has deteriorated since COVID-19, but it must have been difficult as it also has to support other struggling affiliates of Aekyung Group.' The source added, 'Some investors have suggested that they might retain the EBs, considering a potential rise in stock prices later, but it seems virtually impossible in the current situation.'

Aekyung Group stated that there are no issues concerning funding. Aekyung Group's representative said, 'There are currently no situations where a forced sale margin call (additional collateral request) is occurring,' adding, 'We have various funding methods, such as corporate bonds, so we don't foresee significant problems even if Jeju Air's stock price drops.'