S&P Global Ratings kept its ‘CCC+’ long-term issuer credit rating on Hanjin International Corp. (HIC) and the ‘B’ issue rating on the company’s senior secured term loan (’1′ recovery rating) on CreditWatch with negative implications. The ratings were first placed on CreditWatch on March 6, 2020.
HIC faces significant debt maturities in the next three to four months.
All of the company’s debt of US$897 million will mature in September and October 2020. Yet, U.S. dollar funding for the ‘CCC+’ rated hotel property owner is likely to be difficult with significantly increased spreads. S&P still believes HIC’s Wilshire Grand Center (WGC) property in downtown Los Angeles has good asset quality and a competitive location relative to other properties in the area. However, the company will likely face worse funding conditions compared with its refinancing in 2017, considering the pressure facing the U.S. travel industry and hotel operators specifically.
HIC continues to benefit from ongoing support from its parent, KAL, which provides some buffer against a sudden default. KAL is currently in discussion with Korea’s policy banks and other existing lenders about HIC’s refinancing plan as well as funds from new investors. In 2017, HIC refinanced its debt through a US$600 million first-lien term loan B guaranteed by KAL and a US$300 million secured bond guaranteed by the Export-Import Bank of Korea and KAL. Of note, HIC’s debt is also secured by the WGC property, which was valued at about US$1.1 billion as of January 2020. S&P currently applies a two-notch uplift to the rating on the company’s first-lien secured term loan B, above the ‘CCC+’ rating on HIC, based on the rating agency’s expectation of very high recovery.
The COVID-19 pandemic is likely to substantially weaken the company’s hotel operations and cash flows in 2020. S&P expects the ramp-up of HIC’s hotel business in Los Angeles–opened in late 2017–to be further delayed to beyond 2022 due to the global coronavirus outbreak. HIC had expected its profitability to turn around in 2019 but that has been delayed due to the expense burden of its hotel business and low occupancy rates for its offices. HIC closed its hotel in April and May because of a significant decline in demand. The company’s operating performance could come under further pressure if travel restrictions persist beyond the second quarter. S&P’s base case assumes that HIC’s hotel business gradually recovers toward the end of 2020 as the pandemic is brought under control.
S&P expects HIC to have significant discretionary cash flow deficits over the next two to three years. It forecasts the company’s EBITDA to be negative US$10 million-US$25 million in 2020, due to substantially weaker occupancy and room rates during the year. HIC’s EBITDA should modestly recover to US$10 million-US$20 million in 2021 and US$20 million-US$25 million from 2022 as operations normalize and ramp up again. Still, this level of earnings will not be sufficient to cover the company’s annual financing cost of US$40 million-US$65 million over the next two to three years, which remains dependent on refinancing conditions. The company’s interest payment in 2019 was US$45.5 million.
S&P also sees some uncertainty over KAL’s ability to provide timely support to HIC. Currently, 80%-90% of KAL’s global passenger routes, accounting for 60%-70% of total revenue, remain suspended. While S&P expects cost-saving measures and strong earnings from KAL’s cargo business to help offset some of this pressure, the company’s operating performance is still likely to remain under stress during the year. In S&P’s view, KAL’s weak earnings and fixed cash costs (interest payments, aircraft lease payments, and some labor costs) will continue to pressure its liquidity position over the next six to 12 months. In addition, KAL has a large short-term debt of over Korean won (KRW) 5.0 trillion, including HIC’s maturing debt and lease liability, exposing it to volatile funding conditions. That said, KAL has good relationships with Korea’s policy banks, as evident from the policy banks’ recent KRW1.2 trillion financial aid for KAL, the strong track record of global bond issuances guaranteed by the banks, and loans provided by these banks. The company also plans to raise KRW1.0 trillion-KRW1.2 trillion equity by the end of July to improve its financial metrics and liquidity.
S&P is keeping its ratings on HIC on CreditWatch negative, owing to the liquidity pressures and the difficult refinancing environment that HIC and KAL are facing. It intends to resolve the CreditWatch placement within the next three months, pending the group’s ability to secure additional capital and HIC’s refinancing progress.