Concern about Asiana Airlines Inc.’s liquidity is rising after two rating firms warned its debt score may be cut to junk due to a lack of transparency in its 2018 financial report.

The South Korean carrier’s BBB- rating, the lowest investment-grade level, was put on negative review by both Korea Investors Service and NICE Investors Service on Friday after Asiana got a “qualified” opinion for its annual report from its auditor, Samil PricewaterhouseCoopers.

The problem is that most of the carrier’s asset-backed securities and some of its long-term debt include a stipulation that will force it to make an early repayment in the event its rating is cut by one level to speculative grade. At the end of last year, Asiana had about 1.1 trillion won ($969 million) of ABS and 258 billion won of long-term debt that included the trigger, according to Mirae Asset Daewoo Co.

Asiana, Korea’s second-largest airline, faces “material uncertainty” in its business, with its current liabilities surpassing current assets by 1.8 trillion won at the end of 2018, according to Samil PricewaterhouseCoopers’s review. Full-service airlines such as Asiana have been hurt by competition from low-cost carriers as well as fluctuations in oil prices and currency exchange rates.

Samil PricewaterhouseCoopers cited a lack of details on provisions for leasing aircraft and the value of some assets, as well as financial information for Air Busan, a Korean budget airline in which Asiana has a 44.17 percent stake.

Asiana will seek another audit as soon as possible to get an “unqualified” opinion, a spokesperson said Monday.

Analyst Views

  • The weakened reliability of Asiana’s financial reporting may decrease its access to capital markets and raise the possibility of liquidity risk, according to KIS, the local affiliate of Moody’s Investors Service. It said that was one reason for its negative rating review.
  • The impact of Asiana’s debt woes on South Korea’s overall credit market will probably be limited for now because most of its bonds are likely held by individual buyers, meaning that institutional investors won’t be affected much, Park Jin-young, credit analyst at Hyundai Motor Securities, wrote in a note Monday.
  • Asiana’s 60 billion won of notes due April 25 will be delisted, the exchange said on Friday. It sold 85 billion won of hybrid securities at 8.5 percent via a private placement on March 15, according to Korea Exchange data. Its share trading will resume Tuesday under a watchlist.
  • KIS said Monday it has placed some of Asiana’s ABS on watchlist for downgrade.

Tightening Audit

Asiana said in a statement Friday that the reason for the auditor’s “qualified” opinion mostly involved provisions related to leasing aircraft and mileage, to reflect strict accounting standards. It’s just a matter of difference in accounting, and is unrelated to Asiana’s operating ability or cash flows, the company said.

South Korea is tightening audit rules after several accounting scandals including Daewoo Shipbuilding & Marine Engineering Co. in 2016. The government implemented revised auditing rules in November to increase transparency.