South Korea’s two flag carriers Korean Air Lines and Asiana Airlines are anticipating a tie-up, as the nation’s policy lender Korea Development Bank (KDB) vowed to finance the 1.8 trillion won ($1.6 billion) megadeal.

Announcing a plan to help Korean Air Lines acquire a majority stake in its longtime rival, KDB said on November 16 that the merger is indispensable in keeping the nation’s struggling aviation industry afloat.

“The new integrated Korean flag carrier will rise to one of the top 10 most competitive players in the global aviation industry, laying the groundwork to cope with the coronavirus crisis with efficiency and to leap forward in the post-pandemic era,” KDB chairman Lee Dong-gull said, adding that the state-run bank was striving to find a plausible buyer.

The proposed deal will help KDB “minimise the volume of state capital to normalise the aviation industry and retrieve its financing to the companies”, Lee said.

The remark came three months after the proposed buyer of Asiana Airlines, HDC Hyundai Development Co, scrapped its contract with its main creditor, KDB, to buy the indebted aviation firm.

KDB vice-president Choi Dae-hyun said KDB has since reached out to numerous candidates after the 2.5 trillion won acquisition deal collapsed, with Hanjin KAL being one of them.

Under the plan, KDB will inject 800 billion won into Hanjin KAL, a major stakeholder of Korean Air Lines, by buying 10.6 per cent of newly issued common shares as well as exchangeable bonds in a capital increase in December.

Subsequently, Korean Air Lines will raise 2.5 trillion won with new ordinary shares in the first quarter of next year. Of the total, Hanjin KAL will acquire shares worth 730 billion won.

The other 1.77 trillion won will be raised from an employee stock ownership plan, existing Korean Air shareholders including retail investors and possibly public investors.

Using the proceeds, Korean Air Lines will buy 1.5 trillion won of new common shares by June next year through its instalment payment, as well as 300 billion won worth of perpetual bonds issued by Asiana Airlines by end-2020.