When Is Hyundai Going To Get It?

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 sought an emergency loan on May 31 to shore up the group's construction and shipping units, jittery investors immediately began dumping the company's stock. The sell-off sent the Seoul bourse to its lowest level in 14 months.

Next day, investors learned that the construction arm had requested $176 million 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 another red flag for jittery investors, who since January have driven the average share price of the group's 24 listed companies down by 50%.

In truth, the market is out of whack with bottom-line reality. Hyundai expects to earn $6.6 billion in operating profits this year, up 114% from 1999. But confusing signals from the group's founding family have prompted parallels with Daewoo Group, which collapsed spectacularly last year.

Under pressure from the government and creditors, Hyundai rolled out yet another restructuring program on May 31. According to the plan, the Chung family would hand management to professionals. Hyundai also said it would sell $3.3 billion in securities, real estate, and other assets. It would cut $1.9 billion in investments, sell an elevator unit, and invite foreign investment.

While all this sounds impressive, the founding family has broken many promises to restructure. And the longer the Chungs dither, the greater the chance that Korea will plunge into another crisis. Despite first quarter economic growth of 12.8%, many structural problems remain in Korea. And though Hyundai's 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. What Hyundai does next will provide a bellwether for Korean reform.

MONEY-SHUFFLING. So far, the picture is not comforting. 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 August 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. Then it sold the same securities back to the firm at half-price. The net result: A transfer of $23 million to the trust.

Critics also don't like the way the Hyundai group has reduced its debt load of about four times equity in order to meet government expectations. 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 to half the size of its debt. The government figures Hyundai Investment Trust and other group units shuffled $83 million to affiliates last year. Hyundai did not comment for this article.

When Is Hyundai Going to Get It?

Hyundai Investment Trust's problems have spooked the entire Korean stock market. Hyundai and other investment trusts hold bonds with a face value of $75 billion. But no one knows the real value because most have never been marked to market. The impact on the corporate bond market has been chilling. Trading in corporate paper in May fell by about two-thirds from a peak last year, to some $20 billion. If investors continue to shun bonds, a severe capital crunch may result. What's more, some $50 billion in corporate bonds issued during the crisis must be repaid this year. Companies counting on issuing new bonds to finance investments may find few takers.

The chaebol can't turn to the banks, either. Many are in no shape to make new loans because they must comply with new accounting rules. "Bonds meet a third of 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. Most analysts agree that, with the right reforms, the chaebol can fix itself. But that requires firm resolve by Seoul--and swift action by the Chung family.

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