Nikko Citigroup partners with Paul Hastings for a first ever cross-border securitization of cargo receivables.

The Scope

When Korean Airlines (KAL) decided to raise money to support its growth and absorb increasing fuel costs, it opted for a route not yet taken in the Asian airline industry: securitizing future revenues on cargo receivables. With its unparalleled knowledge of the product, the choice of Paul Hastings was a natural one, not just for arrangers Nikko Citigroup and Korea Development Bank (KDB), but also for KAL, whose past experience with Paul Hastings included a major securitization of passenger ticket revenues for routes between Japan and the United States. This time, Paul Hastings would be focusing on KAL’s cargo routes.

The Job

The deal would be structured similarly to passenger ticket securitizations, but the analysis would be far different, requiring the Paul Hastings team (led by attorneys Neil Campbell and Michelle Taylor) to interview KAL’s cargo experts to learn how revenues were tracked and distributed. Cargo shipments, like airline tickets, are sold by a network of agents, and this creates a very complex transactional system. To map out how revenues would be redirected to pay off the securitization, Paul Hastings attorneys had to study how KAL’s cargo receivables were actually collected by the airline. In the end, this would turn out to be the easy part.

The Challenge

Tax law in Japan can change everything, as it did for this cross-border deal when a potential amendment to the country’s tax laws forced Paul Hastings’ attorneys to rework their strategy, not just for the Japanese end of the deal, but for the Korean side as well, where tax law effectively mirrors that of Japan’s. This created a puzzle, for with each piece that was moved on the Japanese portion of the deal, a corresponding piece was affected on the Korean portion. Nevertheless, the deal was restructured, becoming the new template for Japanese yen securitizations in the airline industry.

The Result

The deal, worth ¥20 billion, closed smoothly, ensuring that KAL would have the funding it required to meet its growth objectives and repay existing indebtedness. Meanwhile, Paul Hastings also acted on behalf of JP Morgan, ensuring that the people operating the deal in the years to come would be comfortable and well prepared to meet the needs of investors. Read more about Paul Hastings' Asian Securitization and Structured Finance Group.