Hyundai is key to stock slump

The question of Hyundai Group has reemerged as a major factor that shatters the stock market and the capital market.

As the problem that creditors might switch loans offered to Hyundai Engineering & Construction to equity investment in the company is found to be unclear, the composite stock price index (KOSPI) plunged by 37 points. Also, the market has become shaky with the rumors that Hyundai Investment Trust Securities' projected inducement of US$1 billion from AIG might end in failure.

Investor confidence, which was somewhat stabilized with President Kim Dae-Jung's winning of the Nobel Peace Prize, is unstable now with Hyundai's trouble.

The day's crash was triggered by the remarks by Finance-Economy Minister Jin Nyum that there wouldn't be a conversion of debt into equity investment. That disappointed investors, who expected an early settlement of issues related to Hyundai Engineering & Construction.

What is worse, rumors spread that Hyundai Investment Trust's projected capital inducement from AIG will fail. It was learned that AIG has demanded 2.5 trillion won of government financing, as well as capital input by Hyundai Group, on its investment of US$1 billion. With a gloomy outlook for the semiconductor industry, the price of Hyundai Electronics Industries dropped to its daily low limit.

The question of converting debt into capital investment is very much complicated. It is a sort of special favor to the relevant corporation. In this case, creditors used to dismiss the top executives, who are responsible for the poor management.

However, Hyundai and its leading shareholders are against the idea to deprive of managerial rights from the current management. The problem is that the second-phase corporate and financial restructuring might lose ground without proper resolution of the Hyundai Engineering & Construction situation.

In this connection, the government and creditors have decided to ask for capital investment by Hyundai Asan Chairman Chung Mon-Hun and former honorary chairman Chung Ju-Yung in the ailing company as a self-relief measure.

Hyundai Engineering, feeling the reaction of the market, shortly will sell 6.93% stake in Hyundai Heavy Industries to HHI and 23.86% stake in Hyundai Merchant Marine to chairman Chung Mong-Hun to raise money. Also, the company plans to utilize 85 billion won worth of unlisted stock of Hyundai Asan in order to secure cash.

However, Hyundai's liquidity problem is unlikely to be solved with selling of its stock holdings. The company announced last August that it would cut its debt to less than 4 trillion won by raising 1.5 trillion won by the year¡¯s end. Yet it has raised only 30% of the target amount.

The bearish stock market affected Hyundai's efforts to raise funds through stock selling, but its liquidity problem from poor self-relief efforts is on the issue again. Hyundai's trouble shook the stock market three times -- in May, June and July. Once again, the stock market might tremble unless Hyundai successfully secures enough money to end its liquidity problem or creditors convert loans to capital investment.

Hong Chan-Sun hcs@donga.com