Hyundai's Fix

The chaebol promises to mend its ways. No one is convinced

The rumor had been flying for weeks: Korea's largest chaebol was in need of a money transfusion. So when Hyundai Group Chairman Chung Mong Hun paid Korea Exchange Bank a visit on May 26, faster than you can say asset-shuffle, jittery investors were dumping the company's stock. The sell-off sent the Seoul bourse to its lowest level in 14 months.

Chung had indeed gone hat in hand to the bank for $88 million to shore up Hyundai's construction and shipping units. But he wasn't finished. Next day, investors learned that the chaebol's construction arm had requested $176 million from four other lenders and had told two investment trusts to roll over $265 million in Hyundai commercial paper.

These are trifling sums by Hyundai standards. But they are yet another red flag for jittery investors, who since the beginning of the year have driven the average share price of the group's 24 listed companies down by 50%. In truth, the market response is somewhat out of whack with the bottom-line reality. Hyundai owns various money-spinners that dominate domestic industries from automobiles to ships. All told, the group expects to earn $6.6 billion in operating profits this year, up 114% from 1999.

But the confusing signals emanating from the group's founding Chung family have prompted some investors to draw parallels with Daewoo Group, which collapsed last year owing creditors some $66 billion. Understandably eager to calm the market jitters, the government and creditors persuaded Hyundai to roll out yet another restructuring program.

TO-DO LIST. On May 31, the group said founder Chung Ju Yung and his two sons, group chairman Mong Hun and auto division chairman Mong Koo, would be replaced by professional managers. Hyundai also said it would sell $3.3 billion in securities, real estate, and other assets. It also would cut $1.9 billion in investments, sell a profitable elevator unit, and invite foreign investment in its auto, semiconductor, and shipbuilding arms.

While all this sounds impressive, the founding family has made and broken many promises to restructure over the past two years. Indeed, shortly after the announcement, word came that Chung Mong Koo had in fact refused to resign as chairman of Hyundai Motor. Many analysts believe that even if the Chung clan steps back, it will continue to exert influence over group operations. "You simply can't take their word at face value because of their poor track record," says Hansung University economist Kim Sang Jo.

The longer the uncertainty surrounding Hyundai prevails, the greater the chance that Korea will plunge into another crisis. Despite an economy that grew at an annual rate of 12.8% in the first quarter, many structural problems remain, both financial and corporate.

And though Hyundai's restructuring announcement helped push the stock market up 5.8% that day, the bourse is still down 22% this year. That kind of volatility limits firms' ability to raise money. Worsening the capital crunch is a virtually comatose corporate bond market that is still suffering from the Daewoo collapse. Finally, investors fret that other hidden debt-bombs have yet to detonate at Hyundai and other chaebol.

Like no other conglomerate, Hyundai is inextricably linked with Korea's economic destiny. Given that its $75 billion in revenues represent 20% of GDP, a Daewoo-style collapse is unthinkable. But how well Hyundai navigates the next few months will provide a bellwether for Korean reform. So far, the picture is not comforting.

CASH FLOW. Consider the methods the chaebol has used to funnel cash to troubled units such as deeply indebted Hyundai Investment Trust & Securities. Between July 16 and Aug. 23 of 1999, according to Hyundai documents, two investment funds managed by a Hyundai unit bought $56 million in distressed assets from Hyundai Investment Trust. A day later, it sold the same securities back to the firm at half the price. The net result: a $23 million transfer to Hyundai Investment Trust.

In another instance, Hyundai Investment Trust reported in March that its debts had dropped by half, to $1.4 billion. But a month later, its reported debt was back to $2.8 billion. What happened? Investigators believe the firm parked its debts elsewhere just long enough to comply with a government pledge to the International Monetary Fund that investment trusts reduce their debt by half by March 2000. Hyundai would not comment on the allegations for this article.

Critics also don't like the way the Hyundai group has reduced its high debt load of about four times equity in order to meet another government promise. Rather than sell assets to pay down debt, the chaebol issued more stock and bought new shares in affiliates. It therefore raised its equity base so that it was only two times its debt, which remained roughly the same.

Many of these accounting gimmicks occurred in 1999, when stocks were soaring and the plight of the trusts wasn't widely known. The government's Fair Trade Commission figures that Hyundai Investment and other group units shuffled $83 million to affiliates last year. "The antiquated corporate governance system has invited financial strains by driving away investors," says Seoul National University business professor Min Sang Kee.

The government refused to help Hyundai out of its bind. This despite the fact that Seoul recently agreed to inject $4.3 billion in new funds into two other wobbly trusts--Korea Investment Trust Co. and Daehan Investment Trust Co.--that were stung when Daewoo defaulted on its bonds. This cash injection comes on top of $2.6 billion the government had already invested in the two firms. The fact that Hyundai Investment Trust will have to muddle through on its own has spooked the entire Korean stock market, partly because analysts don't know the depth of the problem. Hyundai and other investment trusts hold Korean bonds with a face value of $75 billion. But no one knows the real value--most have never been marked to market.

Why haven't authorities forced trusts to be more transparent? They planned to. In 1998, the Finance and Economy Ministry vowed to let the market set bond prices. But the Daewoo crisis prompted Seoul to back off. Now the accounting change is to begin in July. Still, the rule will apply only to new bond funds.

The impact of the Hyundai drama on the corporate bond market has been chilling. Trade in corporate paper in May fell by about two-thirds from a peak the previous year, to some $20 billion. With investors wary, companies planning to roll over billions in debt or issue new paper may find they can't.

Hyundai's Fix (int'l edition)

The chaebol can't turn to Korean banks, either. Many are in no shape to make new loans because they must comply with stricter accounting rules implemented this year. Nor is it easy to raise money on the volatile stock market. "Bonds meet a third of all capital needs," says Korea Institute of Finance researcher Lee Dong Gull. "Once this market is dead, the economy cannot function properly."

Some even worry Hyundai's financial strains could push Korea back toward the abyss. Considering all of the solid businesses within the group, most analysts agree that, with the right reforms, Hyundai can be turned around. But that will require firm resolve by Seoul--and real action by the Chung family.

Before it's here, it's on the Bloomberg Terminal.