If This Deal Comes Undone, Watch Out
A year and a half ago, Kim Dae Jung's government stopped a run on Korea's huge but shaky investment trust sector, which invested the savings of Korean households in securities. That bailout--and the restructuring that followed--gave most of the $126 billion industry a new life after its disastrous investments in bonds from Korea's chaebol. Unfortunately, the government didn't quite finish the cleanup. And now, with foreign investors on the verge of buying the last big unreconstructed trust company, Kim's finance team is fumbling the deal. Failure could trigger a new crisis of confidence in the trusts, and infect other parts of the economy.
The immediate problem is a spat over the terms of the sale of Hyundai Investment Trust & Securities Co. (HITC), the weakest of the 28 trust companies, its main shareholder, publicly traded Hyundai Securities Co., and its affiliate Hyundai Investment Trust Management Co. The buyers are insurer American International Group Inc. and U.S. corporate turnaround specialist Wilbur Ross; eventually, others may join. Under the terms of the deal, announced Aug. 23, the consortium will buy controlling stakes in the three companies for $860 million, after the government injects $700 million into the trust business. That's crucial: HITC is technically insolvent, and customers keep pulling funds.
Sounds good: U.S. investors win access to a promising market, and the government solves one of Korea's worst financial problems. But news leaked prematurely. Hyundai Securities shares jumped 26% in the weeks before anything was announced. AIG and Ross say they agreed to pay $5.50 a share for Hyundai Securities. But the company's board now insists on $7.00 to reflect the surge; otherwise, the deal violates Korean securities laws protecting minority investors when a company changes hands. Wilbur Ross says that the investors want the board to pass a resolution saying that $5.50 is fair. He and AIG figure the shares will fall by late November, when the deal is slated to close. "But the board got hung up with the formula," he says. An AIG spokesman reiterated an Aug. 23 statement rejecting the higher price.
That's headache No. 1. Headache No. 2: Angry minority shareholders of Hyundai Securities want to stop the deal in court. "This is a criminal act--usurping minority shareholders' money," says Jang Ha Sung, finance professor at Korea University and a shareholder-rights advocate.
The government is in a fix. Officials say that Hyundai Securities shares aren't cheap at these levels, so board members are spiting themselves by holding out for the higher price. "If HITC ends up liquidated without a joint investment by the government and the AIG consortium, Hyundai Securities, as a major shareholder, will be burdened with its losses," says a state Financial Supervisory Commission official.
RED INK. A final deal was to be signed in October, though Ross thinks the denouement--positive or negative--could come by early September. HITC controls 11% of Korean funds under management. Its losses exceed its capital by $830 million.
If the deal fails, some think HITC's remaining investors will yank their funds, forcing HITC to redeem the corporate bonds it holds. Many Korean companies issued 3-year debt in 1998. Normally, trust companies roll these bonds over when they mature instead of redeeming them. But if HITC can't cover withdrawals, it might demand payment. Some $23 billion in Korean bonds mature between now and the end of the year. Another $39 billion mature in 2002. If Hyundai calls in its paper, companies could default. "The last thing the government wants to see is a run on the trusts that will send companies collapsing one after another," says Kwon Jae Jung, economist at the Korea Institute of Finance, which is funded by commercial banks. One way or another, Kim's government must find a way to respect shareholder rights and still serve Korea's broader interests.
By Moon Ihlwan in Seoul