Seoul: So Long, Corporate Reform

Ssangyong's bailout shows how the government has lost its nerve

If any corporate dinosaur is ready for burial in the graveyard of old Korea Inc., it would seem to be Ssangyong Cement Industrial Co. Not only is Ssangyong losing money making a commodity that is in huge oversupply, but as flagship of one of South Korea's worst-managed chaebol, or conglomerate, the company has squandered billions on ill-advised forays into automobiles, ski resorts, and other sectors unrelated to its core business.

But Ssangyong Cement is instead a poster child for how corporate reform in South Korea, after getting off to an impressive start after the 1997 election of President Kim Dae Jung, has degenerated into farce. Thus, in early January, Ssangyong was one of six sick companies chosen to be saved from bankruptcy by a government bailout. Under orders from the Finance Ministry, state-run Korea Development Bank, investment trusts, and several commercial banks will spend up to $8 billion to buy risky bonds from companies unable to repay debts due this year. The proceeds will go to wiping out loans, and the KDB will try to resell most of the bonds with government guarantees. Seoul also plans to spend $10.3 billion on public works in seven new cities. That should generate lots of pork-barrel contracts for Ssangyong Cement, Hyundai Engineering & Construction Co., and other companies hurting from the country's construction slump.

True, the move has breathed life into Korea's stock market, which plunged by 51% in 2000 as concern over a wave of corporate bankruptcies fed fears of another financial crisis. Combined with the U.S. Federal Reserve interest rate cuts, which raised hopes of stronger exports to America, Korea's Kospi Index jumped 17%, to 590, in the first six trading days of this year, before falling again.

But the long-term damage of government intervention could be severe. It risks weakening the balance sheets of institutions that will now be pressured to buy corporate junk. And by sending the message that practically any large Korean company now qualifies as too big to fail, any remaining confidence that Seoul is serious about cleaning up the chaebol has been shattered. "The bureaucrats have revealed their true nature," declares economist Lee Dong Gull of the semi-official Korea Institute of Finance. "They never fully embraced radical steps to pull the plug from sick companies."

Ssangyong Cement is a good example of a company not worth saving, critics say. Cases can be made for salvaging the likes of Hyundai Electronics Industries Co. and Daewoo Motor Co., which are in strategic sectors and support thousands of suppliers. But Ssangyong Cement is in a crowded, low-tech sector. Korea has seven cement makers, which operate at just two-thirds of their 55 million-ton capacity.

ALBATROSS. Ssangyong's biggest albatross, though, is the massive debt it compiled in the 1990s through wild diversification. Originally a textile company, Ssangyong expanded into cement and other construction-related businesses in the 1960s. When Kim Suk Won, son of the group's founder, took over in 1975, he plunged into heavy machinery, paper, financial services, and a ski and golf resort, his pet project. He also entered Korea's glutted car industry. Ssangyong Cement took major stakes in these businesses.

To his credit, Kim was one of the first chaebol chiefs to radically restructure after the 1997 crash. To reduce the group's $5.5 billion debt, he sold the paper, oil refining, and securities units and half the ski resort and peddled a third of Ssangyong Cement to Japan's Taiheiyo Cement Corp. In 1998, he sold money-losing Ssangyong Motor to Daewoo Motor. He now is negotiating to sell a telecom business to Newbridge Capital Inc. and Carlyle Group of the U.S. for $239 million.

Trouble is, Ssangyong is still under water--and it's running out of assets to hock. To complete the sale to Daewoo, Ssang-yong had to assume $1.4 billion of the auto unit's debt. But it has lost some $700 million in the past two years and has survived only because creditors have repeatedly rolled over debt. The domestic bond market has no appetite for Ssangyong paper. Raising capital in Korea's comatose stock market and from banks also is out of the question.

With so many companies in deep trouble, last fall it seemed the great shakeout of Corporate Korea was set to begin--until the government stepped in. Ssangyong, given the chance to erase debt, much of it carrying 13% interest, hopes it can now become profitable, says spokesman Lee Sang Chan. But unless creditors cut it more slack, analysts say Ssangyong is unlikely to earn enough to pay the $186 million in interest due this year. Kim has resigned as chairman. Japan's Taiheiyo will now control half of the board, but current Ssangyong managers will make up the other half.

The big question is why Ssangyong must survive. One less big player would help Korea's other struggling cement makers break even. Nor is the cash crunch over. Because KDB has only $3.3 billion in capital, it hopes to unload Ssangyong paper on reluctant trust funds and banks. The strong-arming has begun. Korea First Bank, the only Korean bank run by a foreign investor--Newbridge--has refused to buy Ssangyong bonds despite many calls from financial regulators. Officials have hinted that if Korea First doesn't play ball, it won't get help should it run into a liquidity crunch. "This is exactly why the Korean banking system needs a foreign player who can say no," insists a Korea First executive.

It's a sign of how badly the reform effort has derailed when the regulators charged with cleaning up the banks are now pushing them to take junk bonds. Some $52 billion in corporate bonds are coming due this year, and Seoul is eager to force creditors to roll much of it over. This is because "the financial market has remained dysfunctional," explains Finance Ministry Deputy Director Han Seung Woo. So it's clear what to expect from Seoul: more corporate bailouts. As the debt fuse sizzles and the will to reform fades, Korea Crisis II may be looming.

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