Korean Air launches cargo receivables securitisation

The deal, arranged jointly by Nikko Citigroup and the Korea Development Bank (KDB), involves the issuance of ¥20 billion (186 million) of secured floating rate notes due in 2008 by a special purpose vehicle incorporated in Ireland called 'KAL Japan ABS 2 Ireland'.

Neil Campbell, partner and head of the Asian securitisation and structured finance group at law firm Paul, Hastings, Janofsky & Walker in Hong Kong, who advised the joint arrangers, said the deal is the first securitisation of cargo receivables in Asia. He added: “We securitised all the receivables arising from Korean Air’s cargo routes out of Japan. There is a lot of potential for airlines to look at passenger ticket and cargo receivables as a means of raising finance. We’ve worked on a number of passenger ticket deals and this is the first cargo deal in Asia."

Proceeds from the sale of the notes will be used to “repay existing indebtedness”, according to Campbell. He added that the amount of future cargo receivables that’s been securitised exceeds ¥20 billion by a significant amount, but did not reveal the exact figure.The notes pay interest of one-month yen Libor plus 40 basis points per annum. Payments on the notes are backed by future revenues from the sale of cargo services on KAL’s routes from Japan. The issuer also has a credit facility from KDB to support payment on the notes.

The notes are rated A by Fitch and A- by Standard and Poor’s, and are listed on the Irish Stock Exchange.

This is the second cross-border securitisation by Korean Air. In September 2003, the airline launched a securitisation of passenger ticket receivables worth ¥27 billion. Paul, Hastings, Janofsky & Walker also acted as transaction counsel on that deal.

Michelle Taylor, a Counsel in Paul, Hastings, Janofsky & Walker's Asian securitisation and structured finance group in Hong Kong, describes the deal as being “over-collateralised”, which means there is likely to be excess receivables revenues in future after paying interest, principal and expenses on the notes. The extra money would go back to KAL through a seller certificate.