Is Hyundai About To Topple, Too?

Korea's government may stop propping up the chaebol

Eight months ago, Chung Mong Hun was the man to watch in South Korea's corporate world. His legendary father, Hyundai Group founder Chung Ju Yung, had just named the 52-year-old Fairleigh Dickinson graduate as heir to the country's largest industrial conglomerate. He also was put in control of the chaebol's most prized units, including flagship Hyundai Engineering & Construction Co. The big loser: Chung Mong Koo, who as the scion's eldest son should have taken over the empire, but had fallen out of favor following a bitter family feud.

But by mid-November, the tables had turned in the Chung family. With the chaebol's leading businesses caught in a desperate liquidity squeeze, a chastened Chung Mong Hun turned up at the Seoul office of his estranged brother and asked for a bailout. Mong Koo, as it turned out, controlled the one piece of the conglomerate that was still earning plenty of cash--Hyundai Motor Co., which formally severed links with the rest of Hyundai in September. There was a time when such a request would have been instantly honored. But after refusing for days even to meet with his younger brother, Mong Koo gave his response on Nov. 10: a resolute "No."

The humiliating visit could well turn out to be the pivotal event that cost Mong Hun his corporate realm. Hyundai Engineering, Korea's mightiest construction company, is on the brink of collapse. Under heavy pressure from creditors and the government of President Kim Dae Jung, Mong Hun is fast running out of ways to salvage Hyundai Engineering, which was laid low by ill-fated construction projects in Iraq and Saudi Arabia.

FEWER CHOICES. For several months, the unit had survived by the mercy of its creditors, who repeatedly rolled over payments as they came due. On Nov. 8, banks agreed to give Hyundai Engineering a reprieve on $608 million in payments until the end of the year. Mong Hun also has managed to stay afloat with a little help from the government. On Nov. 14, state-owned Korea Land Corp. gave him $185 million as an advance payment for a joint construction project that eventually is expected to fetch more than $500 million. At the personal request of Korean President Kim, meanwhile, the Sultan of Brunei agreed to speed up payment of $38 million that the tiny Southeast Asian nation owes Hyundai for construction work.

But Chung Mong Hun is fast running out of options to service Hyundai Engineering's crushing $4.6 billion debt. Raising new money from outside investors is unlikely: Korea's equity and bond markets are nearly dead. Nor is any foreign company on the horizon to pump in capital. "Buying time won't do the trick," says Seoul-based HSBC Securities strategist Lee Jeong Ja. "Unless its debt load is drastically cut, Hyundai Engineering has no hope of getting back on its feet again." Although the government and banks may regard Hyundai Engineering as too big to fail, they have little loyalty to Chung. As a result, banks may soon declare the company bankrupt, have a court convert their debt into equity, and impose a new management.

Chung's troubles don't end there. He also heads near-bankrupt Hyundai Investment Trust & Securities Co. The disclosure in April that the trust had accumulated losses exceeding its net worth by $1.1 billion, mainly by purchasing bonds in failed Daewoo Group, is what sapped lender and investor confidence in all Hyundai Group companies, precipitating the liquidity crunch.

The financial crisis also has sharply eroded the profitability of Hyundai Electronics Industries Co., the most valuable asset now under Chung's control. One of the world's largest makers of computer memory devices, the electronics unit thrived in the first half of 2000, thanks to high global chip prices. But even though sales doubled to $3.9 billion in the first six months, the chipmaker still posted a $326 million loss due to its 28% equity stake in Hyundai Investment Trust, as well as losses stemming from write-offs on excess inventory and failed overseas investments.

With global prices for 64 megabit dynamic random access memory chips dropping again, from $9 in July to about $3 now, Hyundai Electronics could be facing cash flow problems at a time when it should be making huge new investments to be competitive in next-generation devices. Equally worrisome is the fact that 50% of the chipmaker's $6.5 billion in debts mature before the end of 2001. "It looks like there's no way out for Mong Hun," says Rhee Namuh, head of research at Samsung Securities in Seoul.

No way out for one of the great tycoons of Korea? It's hard to believe. But chaebol reforms pushed by the Kim government have limited Mong Hun's ability to stay afloat. Even if his elder brother wanted to help, Hyundai Motor--whose domestic and export business is now doing remarkably well--is a legally independent company. Any deals it does will require approval by DaimlerChrysler, which purchased a 9% stake in the Korean carmaker in September and now controls two seats on the company's 10-member board.

None of this is stopping Chung Mong Hun from resorting to the old-style brinkmanship that chaebol--and big companies around the world--have always used to escape financial jams. Indeed, that is the only reason bankers haven't pulled the plug already. Mong Hun's leverage with lenders and the government is that 3,000 companies rely on Hyundai Engineering. A bankruptcy would throw many thousands out of work. Mong Hun is "holding the economy ransom," laments Lee Phil Sang, dean of Korea University's business school. "He is trying to muddle through in the hope that the costs will be paid by taxpayers."

Chung's confidence that the government will come around explains why he spurned a debt-for-equity proposal by lead lender Korea Exchange Bank in early November. Chung also hasn't given up hope that he can raise enough money through asset sales. He is trying to sell Hyundai's financial units, which in the past served to funnel funds to affiliates. A consortium of U.S. investors, led by insurer American International Group Inc., is negotiating to acquire, for $970 million, management control of Hyundai Securities, Korea's largest broker, along with two Hyundai investment trust companies. The AIG consortium is asking the government to cut the interest rate on $2.2 billion in loans to the trust by half, to 3%, to make the purchase palatable. But if the deal goes through, that won't help Chung much because the money will be used to cover the big losses of the financial companies.

BACKUP. Chung has prepared a convoluted backup plan should the construction unit be placed in receivership. On Nov. 2, Hyundai Engineering sold a controlling 15.16% stake in Hyundai Merchant Marine Co. to Hyundai Elevator Co. That arrangement will allow him to control Hyundai Merchant through the elevator unit, instead of the construction unit. In turn, Hyundai Merchant is the largest shareholder in the electronics, brokerage, and trading arms.

Chung has also gained time from some of the government's missteps. Despite policymakers' deep desire to rein in the chaebol--especially giants like Hyundai and Daewoo--they are flinching from actually shoving Chung's companies into bankruptcy. Government-backed banks gave Hyundai Engineering a two-month reprieve on Nov. 3, when they excluded it from a list of 29 ailing companies facing closure or receivership. Then, 10 days later, Lee Keun Young, chairman of the state Financial Supervisory Commission, suggested creditors should provide fresh funds to the construction unit if it presents a credible self-rescue plan.

But while the government seems to have plenty of reasons to keep alive Hyundai Engineering and the group's other troubled holdings, that doesn't mean that Chung himself will emerge victorious. The banks, even government-controlled ones, seem to have concluded that the best way for them to recoup their capital is to convert their debt into equity and to oust Chung. That's exactly what they did to once-mighty Daewoo Chairman Kim Woo Choong when they forced a breakup of that chaebol. If the same happens at Hyundai, then one more icon of Korea Inc. could fade into oblivion.

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