What's in a name?

The near default of Hyundai Engineering and Construction highlights how little is left in the Hyundai name.

What is in a name? Not much, if you are a creditor of Hyundai Engineering and Construction, Korea's largest contractor. The company escaped defaulting on loans worth $21 million to its main creditor bank Korea Exchange Bank by just a few hours. It has to find a similar amount on Wednesday 1 November to pay debts that fall due then.

The situation stems from creditors pulling the rug on demands for fresh credit as maturing debt came due. It also stems from the fact that other Hyundai affiliates are no longer supporting their ailing cousin. That such a thing should happen to a company with the Hyundai name backing it would have been unthinkable just two years ago. Now it is seen as healthy.

This default highlights the fact that the Hyundai chaebol exists in name alone. The usual ties that bound the disparate corporate entities of the Hyundai group have been rent asunder. Firstly – and perhaps most symbolically – the family ties that glued the whole machine together have been broken.

Informed observers report that the patriarch, Chung Ju-Yung is not speaking to his eldest son Chung Mong-Koo, who in turn is not speaking to his younger brother, Chung Mong-Hun. That such a situation should happen in a filial Korean family is strange enough. When that family is the Chung family that controlled the largest conglomerate this side of GE, it is extraordinary.

Chung Mong-Koo now runs Hyundai Motors and has taken great strides in dissolving all ties to the rest of the Hyundai group. On 19 October, Hyundai Motors declined to buy any of Hyundai Engineering and Construction's convertible bonds, designed to raise cash to pay off the maturing debt. The market cheered, pushing Hyundai Motor stock up by its daily limit of 15% on the day it was announced.

Mong-Koo has also brought outside shareholders and board members into the company, another huge break in tradition for a Korean corporate entity. Daimler Chrysler now has around 9% of the company and has a seat firmly placed at the boardroom table. Capital Group of the US also has an 8% stake in the company, which it acquired in the open market.

Others to follow lead

This strategy of breaking ties with the mother ship is being followed by other Hyundai affiliates. Hyundai Heavy Industries, the largest shipbuilder in the world, also declined to buy into Hyundai Engineering and Construction's convertible recap bonds. It is also planning to sell its holdings in other Hyundai affiliates and has said that it will sue Hyundai Electronics over a $220 million debt payment.

Hyundai Electronics itself has announced plans to sell off non-core business units and bring in foreign shareholders. It will use the money to beat an upcoming cash crunch and then has plans to list on the NYSE next year. It also plans to issue around $500 million in international bonds, with all the attendant covenants ensuring financial rectitude that such a move entails.

Hyundai Securities is in advanced stages of negotiations with a US consortium to sell a 23.7% stake in itself for around $1 billion. The brokerage – Korea's largest – will use the cash to offset disastrous investments made not only in the Daewoo group but also in other Hyundai group affiliates. These investments resulted in the company making a W82 billion ($73 million) loss in the quarter that ended in June 2000. This compares with a W315 billion profit that the firm made in 1999.

By May this year, Hyundai Investment Trust Management – a subsidiary of Hyundai Securities – had debts of W1.2 trillion more than it had assets. Many of the investments that resulted in this loss are believed to have been made supporting weak affiliates of the Hyundai group.

The US investment group buying into Hyundai Securities – comprising AIG, Wilbur Ross, GE Capital, Aegon, Calpers and the State of Wisconsin Investment Board – is unlikely to invest in a company that would repeat such moves. There will probably be very heavy covenants tied to any investment in the securities company that prevent it from name lending to its affiliates.

People on the move

Recent personnel changes echo what is happening with the group's finances. In September Lee Ick-Chi, president of Hyundai Securities and Hyundai Asan, resigned from the Hyundai group after 31 years of loyal – perhaps too loyal – service. In recent years he had been convicted for using Hyundai Securities to manipulate stock prices to support Hyundai Electronics. He is also under investigation for writing an agreement that Hyundai Heavy Industries would be immunized against losses stemming from a loan guarantee it made to Hyundai Electronics. His departure is another example that the old intra-Hyundai ties are weakening.

While Hyundai has been making it clear for some time that it wants to dismantle its conglomerate structure, investors have been treating the situation with caution. It is easy to make a few natty presentations, bang on about shareholder value, sell a few shares and then return to normal. But this time it looks serious. The fact that long serving employees are being sacked, companies are going under and, crucially, the Hyundai name is being turned to mud, is enough evidence that a revolution has occurred.

Hyundai companies are divesting their cross shareholdings, they are ending the cross guarantees and they are cutting the ties with their affiliates. Investors should take comfort from this. If you are investing in a Hyundai company, you should not expect any drainage of resources by the rest of the conglomerate. The recent moves by the group show that, although there is still a long way to go, this process has started in earnest. In time, perhaps the only thing that will link these companies will be the Hyundai name itself. And then it will be a name worth financing.

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