May and June were busy months for the Hyundai Group, which has been squarely in the public spotlight for two key reasons. First, the requests for extensions of overdraft limits from Hyundai Engineering & Construction and Hyundai Merchant Marine to their creditor banks. Second, a glaring W1.2 trillion ($1.08 billion) negative net asset situation at Hyundai Investment Trust & Securities.
The immediate cause of these problems was the Daewoo default last year. This event caused direct losses to be absorbed by Hyundai Investment Trust & Securities. It precipitated a chain of events that caused a sharp pullback in the domestic bond and money markets. The financially weaker Hyundai companies, in particular, had relied on these markets for the bulk of their short-term funding.
However, the real root of the problem went much deeper. It included an insatiable thirst for expansion while most other major chaebol were consolidating their operations, and an outdated system of corporate governance by which the controlling Chung family ruled over the Hyundai empire unchallenged.
Danger overstated
The events at the three Hyundai companies mentioned above were, however, temporary and did not create a critical situation. The Hyundai Group's assets have extensive cash-generating potential, substantially in excess of the group's capital costs. This fact will become more apparent throughout this year as significant increases in operating results are expected to be reported. It would be irrational for the group's creditor banks to disregard this fact, and it is highly unlikely that they ever seriously contemplated an abandonment of the group.
Contingent risks contained?
Nevertheless, the creditor banks as well as the government saw a contingent danger in the groupÆs continuing expansion plans, although they had been ineffective in blocking it. The sheer size of the Hyundai Group meant the situation had to be handled delicately.
The disruption in the domestic capital markets did what the government and the creditor banks alone could not û bring about a reversal of the groupÆs expansion. The situation remains extremely fluid and various risks are still inherent in Hyundai exposure.
But, throughout the events of the previous months, the Hyundai Group always was and continues to be money good.
John Kim is Head of Special Situations Research, North Asia, at Salomon Smith Barney.
