South Korea’s Hanjin and Hyundai groups are confronted with difficulties in their efforts to make their balance sheets cleaner amid controversy over the nature of perpetual bonds they are seeking to issue, industry sources said Tuesday.

The controversy came after the country’s financial authority said it is problematic to recognize perpetual bonds as capital. The Korea Accounting Institute is set to decide a final position on the nature of such bonds on Thursday before conveying its decision to the financial authority.

The upcoming decision is likely to affect plans by South Korea’s top air carrier Korean Air Lines Co. and Hanjin Shipping to each raise up to US$500 million by issuing perpetual bonds.

Korean Air and Hanjin Shipping are two key affiliates of the country’s 10th-biggest conglomerate, Hanjin Group.

The companies have favored issuing perpetual bonds as such bonds do not have a maturity so can be considered as capital on their balance sheets, which in turn could lower their debt-to-equity ratio.

Korean Air’s debts stood at 20.3 trillion won ($18.5 billion) as of June and its consolidated debt-to-equity ratio is more than 500 percent. A Korean Air official said its debt-to-equity ratio can be lowered to 200 percent if perpetual bonds are recognized as equity.

The official said his company will take its next step after the KAI makes its final decision on the issue.

The KAI’s decision is also likely to affect a plan by Hyundai Merchant Marine Co., South Korea’s No. 2 shipping line affiliated with Hyundai Group, to issue perpetual bonds worth between $300 million and $400 million.

Last month, Hyundai Merchant Marine Co. said it was reviewing a plan to sell shares worth 200 billion won in a bid to secure working capital.

An official of a financial institution said companies do not necessarily have to issue perpetual bonds if such bonds are not considered equity, noting a high debt-to-equity ratio could worsen financial health and credit ratings. (Yonhap News)