Asian Airlines, Shippers Face Higher Loan Costs

Asian airlines and shipping companies, already battling a slowdown in cargo traffic, are facing significantly higher borrowing costs as European banks pull back from lending.

The companies are turning to the bond market and government export agencies and seeking out new banks to fill the lending gap, but industry executives worry that if credit remains tight, it could force companies to scale back spending.

"It's manageable at the moment, but the credit pullback is going to have a pricing effect," said Robert Martin, chief executive of BOC Aviation, the leasing arm of China's Bank of China. If the problem persists through next year, it could force aircraft manufacturers to lower production.

The squeeze comes at a particularly tough time for companies that are already struggling. Two units of loss-making Hanjin Shipping Co., South Korea's largest shipping firm by sales, are trying to refinance a $500 million corporate loan that was made in 2006 by more than 10 lenders including French banks Credit Agricole SA and BNP Paribas SA and Belgium's KBC Bank. The interest rate on one tranche of that loan was 0.95 percentage point over the London interbank offered rate, an international interest-rate benchmark.

Hanjin has added one South Korean bank in the new financing, but is still paying an interest rate 3.75 percentage points above Libor and borrowing about $100 million less than before, according to loan data provider Basis Point. Credit Agricole declined to comment and BNP Paribas and KBC didn't respond to a request for comment.

People involved in the market blame a portion of the higher interest rate on banks pulling back on lending as they try to slim their balance sheets, and a portion on the weak economy, which is hurting profits and making the shippers higher risks.

Australian airline Qantas Airways Ltd. is paying more than double the spread over a benchmark interest rate on a $122.4 million aircraft loan made this year, compared with what it paid on a $370 million aircraft loan it took out in 2008, the airline said.

Stronger companies are turning to the bond market to raise funds. Cathay Pacific Airways Ltd. Chief Executive John Slosar on Monday acknowledged that borrowing costs have been going up. The Hong Kong-based airline sold a seven-year bond for the first time in recent years to raise $85 million in October, paying 3.9%.

Boeing Co. estimates capital markets will fund $10 billion of aircraft deliveries next year, amounting to 10% of the total funding needed by the industry, up from $4 billion this year.

Asian airlines are particularly exposed to lending from European banks, which account for roughly 20% of the financing for aircraft and shipping globally. In Asia, people familiar with the market say, it's well above that. Stepping in to fill the gap are Asian lenders such as Singapore-based BOC Aviation, and ICBC Financial Leasing Co., the finance leasing arm of Industrial and Commercial Bank of China Ltd., as well as aircraft manufactures such as Boeing and Airbus.

Besides the bond market and regional banks, companies are turning to government lending agencies such as the U.S. Export-Import Bank for loans.

Kostya Zolotusky, managing director of Boeing's financing arm, said of the $77 billion of global aircraft deliveries due this year, 30% have been funded by export-lending agencies, and 25% to 28% by commercial banks, with European commercial lending accounting for about 18% of overall lending.

"Several countries like China have abundant domestic liquidity, access to U.S.-dollar funding and development banks to help in serving this market," said Emmanuel Pitsilis, director, at McKinsey & Co. "However, most markets do not have this luxury. While some new international banks, Japanese for example, may be able to fill some of the gap, this situation is likely to lead to at least temporary disruptions for companies relying on European banks for funding."

For the companies that got their deals done, the reaction is relief.

"We're fortunate in that early this year, we secured financing for the last two vessels we have set for delivery by 2013; we'd definitely be paying higher margins if we borrowed money from banks now," said Raymond Ching, vice president at Hong Kong-based ship owner Jinhui Shipping & Transportation Ltd.

--Nisha Gopalan, Jeffrey Ng, Kyong-Ae Choi and Andrew Critchlow contributed to this article.