Hyundai units in liquidity crunch

Two Hyundai units have been forced to obtain additional overdraft facilities in order to meet bond repayments as mutual fund redemptions show little sign of slowing in South Korea.

Hyundai Engineering and Construction (HEC) and Hyundai Merchant Marine (HMM) have had to secure additional short-term overdraft facilities from creditor banks in order to see off the threat of default on maturing bonds. The state-owned Korea Exchange Bank and other banks have agreed to lend an extra W350 billion ($307 million) to the two companies, which have been unable to roll over their bonds as investment trust corporations (ITCs), the biggest buyers of corporate paper in South Korea, face massive mutual fund redemptions. The redemptions reflect concerns the ITCs are holding large amounts of bad debts and may have trouble honouring their committments.

The cashflow problems are confined to HEC and HMM and other parts of the Hyundai Group are not expected to have to adopt similar measures. "I think the problems can be contained within the two companies," says Terence Lim, Merrill Lynch's head of research in South Korea. Other analysts agree. "These problems, at least for now, are limited to these two companies," says So-yon Sohn, credit analyst at Salomon Smith Barney. " This is not a repeat of Daewoo. Hyundai has some good companies with good products," .

Hyundai Group as a whole has around W8.5 trillion of its W36.1 trillion debt maturing this year and has W4 trillion of available funds - W3 trillion on deposit and W1 trillion of unused overdraft facilities - to meet these repayments before taking account of group earnings. Hyundai Heavy Industries has utilised 63% of its existing overdraft facilities, Hyundai Electronics 51% and Hyundai Motors 1.4%, suggesting none of these core units is likely to require "emergency liquidity" in the near future.

One positive factor arising from HEC and HMM's financial woes is that Hyundai Group's restructuring may gather pace. The Chung-family-controlled Hyundai Group is under pressure from minority shareholders, banks and the South Korean government to sell/spin-off assets and companies as well as improve corporate governance.

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