May 29 2000

Business and Finance - Asia

Loans to Two Hyundai Affiliates
Trigger Alarm Among Investors

By JANE L. LEE
Staff Reporter of THE WALL STREET JOURNAL

SEOUL, South Korea -- Two major affiliates of Hyundai Group received temporary loans from their main creditor bank, stoking concerns about the financial health of South Korea's largest conglomerate and sending tremors through the stock market.
Korea Exchange Bank said Friday that it extended 50 billion won ($44.3 million) in credit each to Hyundai Engineering & Construction Co. and Hyundai Merchant Marine Co. The news sent the stock market into a tailspin, with the shares of all listed Hyundai affiliates plummeting. The benchmark index fell more than 6% to close Friday at 656.66 won.
Hyundai and bank officials stressed the problem was merely a glitch in short-term money management. But on Saturday, the construction company requested a further total of 200 billion won in loans from four other banks and wanted two investment trust firms to roll over 300 billion won of commercial papers coming due before the end of June.

Credit Concerns

Most analysts and fund managers said problems at Hyundai Engineering, however bad they might be, wouldn't threaten the entire group -- unlike last year's near-default of South Korea's second largest conglomerate, the Daewoo Group, which has an estimated 89 trillion won in liabilities. They point out that, while most Daewoo affiliates had cash-flow problems and few were profitable, Hyundai Group affiliates are relatively healthy and making money. "Autos and electronics, the two big sectors for Hyundai, have good cash flow, so a groupwide problem like Daewoo is unlikely," said Del Ricks, an analyst at W.I. Carr Securities in Seoul.
Some analysts argue that a bankruptcy at any Hyundai affiliate, big or small, would immediately cut off other Hyundai Group companies' access to credit, eroding the financial state of the entire group. That could be detrimental to South Korea's economy, which is still grappling with tough financial and corporate reforms since a financial crisis erupted in late 1997. Therefore the government would use all means to prevent it, they said.
Trouble at Hyundai firms started bubbling to the surface when the government said in late April that it wouldn't inject public money into Hyundai Investment Trust & Securities Co., which was saddled with bad debt from Daewoo Group and had been suffering years of losses. Investors have been concerned that other Hyundai affiliates would have to shoulder the burden of cleaning up the trust company.

Debt Rollover
As a result, from March to mid-May, financial institutions holding Hyundai Engineering's debt refused to roll over 297 billion won of commercial paper and bonds which came due, disrupting the construction company's short-term financing, according to Korea Exchange Bank. Rolling over debt automatically for large conglomerates has been a long-rooted, and sometimes risky, practice in Korea, analysts say.
The construction company has been hit harder than other group affiliates because its operating costs are much higher, said a Hyundai Engineering spokesman. Payment usually comes after its construction projects are finished, and the business is sensitive to real-estate prices and interest rates in the meantime, he explained. But he said Hyundai Engineering forecasts a 141.9 billion won net profit this year, compared with a net loss of 120 billion in 1999. It has already booked 12.3 billion won in profit for the first quarter.
According to Korea Exchange Bank, 535 billion won of Hyundai Engineering's commercial paper is scheduled to come due before July and 600.4 billion won in bonds are due by the end of the year. On Sunday, to further dispel concerns, Hyundai Engineering said that it would sell assets valued at 543 billion won, including securities and real estate, in the second half of the year to raise cash.

Damage Control
The problems at Hyundai can be contained, says the creditor bank. Hyundai Merchant Marine, whose sales last year totaled 4.8 trillion won, has nearly 300 billion won of debt maturing, but more than a trillion won in available cash to cover the payment, said Korea Exchange Bank. The bank also stressed that Hyundai Group as a whole had "only" 2.4 trillion won of commercial paper due by the end of June and 4.4 trillion won of bonds due by the end of the year. "As long as Hyundai Engineering & Construction's short-term money supply problem is solved, there will be no problem for any Hyundai affiliate's short-term liquidity," the bank said in a news release.
Separately, creditors of Saehan Group on Saturday approved a debt-restructuring program for Saehan Media, but held back approval for its affiliate textile company Saehan Industries Inc. for further discussions. Saehan Group, a midsize Korean conglomerate, asked its creditors for help earlier this month. The two affiliate companies have a combined two trillion won in debt.
Also, the government said Daewoo Group and a committee representing its foreign creditors have finalized terms of a proposed cash buyout of Daewoo's foreign debt. Foreign creditors can apply to take part in the buyout program until the end of June, it said. Details of the final terms weren't immediately available. In January, a tentative agreement between the two sides would have given foreign creditors roughly 39% to 40% in cash of the overall face value of their outstanding loans to Daewoo.