Hyundai Engineering resorts to brinkmanship with banks

Hyundai Engineering & Construction managed to swing a stay on all debt repayments until year-end and is now pushing for W180 billion of fresh loans. Can Korea afford not to lend the money?
Hyundai Engineering & Construction’s (HEC) message to the Korean government and creditor banks in recent days has been clear; without further liquidity support the company will fold, taking with it the current fatade of normality in the Korean economy. To drive home this message, HEC froze payments to its 19,000 employees for one day. The move worked and the company's 12 domestic creditor banks agreed to halt all debt repayments until year-end.

A day later, HEC decided to push its luck, requesting that creditor banks extend fresh loans totalling W180 billion ($162 million) so it could settle short-term debts with non-bank creditors. So far these haven’t been forthcoming and Hana Bank and the Industrial Bank of Korea have both ruled out the possibility of fresh loans to HEC. 

But the government and the banks are in an awkward spot. They can gamble hundreds of millions of dollars propping up HEC in the hope it will once again become a viable entity or they can have the company declared insolvent and arrange some sort of debt restructuring; something that could force the liquidation of HEC sub-contractors as well as jeopardize already frail bank balance sheets. 

HEC currently has debts of just under W5 trillion, of which W2.5 billion are due within the next 12 months. It has said it will raise up to W1.5 trillion this year by selling property and holdings in affiliates. For 1999, HEC reported a net loss of W121 billion, including provisions totalling W96 billion, on reduced revenues of W5.7 trillion. In March, the company said it expected to achieve a net profit of W142 billion on sales of W7.3 trillion in 2000.

Financing drought

Although the Korean government has so far denied the possibility of HEC requiring a debt workout programme, creditor banks are less confident and have been reluctant to refinance maturing debt for some months. That, coupled with massive redemptions at investment trust companies, has dried up HEC’s financing. Like the banks, local credit rating agency Korea Management & Consulting Credit Rating Corp is concerned about HEC’s financial position, and this week downgraded the company’s credit rating to BB+ from BBB-.

Wahid Butt, research head at Indosuez WI Carr Securities in Seoul, is more direct: “HEC is bust. It’s clearly bust; the company has no liquidity.” Nonetheless, he doubts the company will be allowed to fold. “If HEC is bust, people are going to start pointing fingers and asking how many others are bust,” he adds. As things stand, the creditor banks, or at least some of them, look like betting upon a turnaround in HEC’s fortunes, though one wonders how much better the company's operating environment can get given that the Korean economy grew by 10% in 1999 and a further 8% growth is forecast this year. 

Merrill Lynch’s Korean research head Terence Lim says regardless of what happens at HEC the rest of the Hyundai group will survive given that debt guarantees between affiliates have in the main been unravelled. ‘The Hyundai Group’s problems are a lot different from those of the Daewoo Group of companies … In the worst-case scenario, if HEC is forced into a debt restructuring programme, the problems will not affect the other companies in the rest of the group,” says Lim. The only significant support from other Hyundai units that is still in place is W500 billion of project finance provided by Hyundai Heavy Industries in respect of overseas projects.

Ironically, Hyundai Heavy Industries (HHI), the world’s biggest shipbuilder, earlier this week had one of its remaining loan guarantees called, forcing it to repay $220 million to Canadian Imperial Bank of Commerce in respect of a loan taken out by Hyundai Electronics. HHI has said it will file lawsuits against Hyundai Electronics President Park Chong Sup and Hyundai Securities chairman Lee Ik Chi to try and recoup the money plus interest. Hyundai Securities allegedly gave written assurances HHI would not suffer financially as a result of the loan guarantee and Hyundai Electronics claims it is not obliged to repay HHI.

The case is considered significant insofar as it suggests ties between the Hyundai units are weakening as group founder Chung Ju Yung steps aside and his children take over.