Current status of Hyundai`s three problem companies

Once again, the government actively is trying to solve problems faced by three Hyundai Group companies -- Hyundai Engineering and Construction, Hyundai Electronics Industries and Hyundai Investment Trust and Securities.

It is understood as a desperate measure under the pressure of necessity for the government to keep its promise to complete reform of four major sectors by the end of February.

Unlike in the past, the government`s strategy calls for reviving the companies by all means and then pressuring them to go ahead with restructuring. For this reason, Hyundai`s trouble is no more a big issue in the capital market. Still, the feeling of Hyundai`s instability exists in the market. It is because the three companies` fundamental problems of excessive debt-to-equity ratio and low profitability haven`t been resolved. We`ll examine the current status of those Hyundai affiliates as well as problems of the government policy.

1. Hyundai Engineering and Construction: The government considers emergency funding to HEC:

So far this year, Hyundai Engineering and Construction (HEC) has asked its creditor banks such as Korea Exchange Bank, Hanvit Bank, Shinhan Bank and H&CB for a fresh funding of 460 billion won in total. The company is in a position to pay for the maturing promissory notes it issued last October, but it is unable to pay them due to shortage of cash.

Even considering the fact that cash demand is high during the first quarter for most construction companies, creditors find Hyundai¡¯s request for additional funding since they already have rolled over 2.57 trillion won of loans and maturing corporate bonds.

The government showed its strong will to revive HEC and has decided to offer a payment guarantee for the company`s overseas construction works. The problem is if Hyundai has consolidated its basis for survival.

An official of Korea Exchange Bank dealing with Hyundai financing, said, "HEC will be able to survive independently only if it reduced debt from 4.5 trillion won at the end of last year to 3.5 trillion won by the end of this year."

Early this year, Hyundai announced its self-rescue plan to raise 748.5 billion won with a goal to generate 268.2 billion won of operating profit for the year. Creditors see that the plan is realistic, as the company could raise at least 500 billion won, including sale of its premises in Kye-dong at about 200 billion won and collection of 250 billion won from remaining sites of Seosan farmland. However, its goal for operating profit cannot be guaranteed because this year`s projected economic recovery could be delayed.

"If HEC fail to satisfy its self-rescue plant, we might have to reduce its debt through equity conversion of the loans," an official of Hyundai`s creditor bank said. "And the government would be struggling to make a decision when to use such a card."

2. Hyundai Electronics Industries: Thorough Restructuring Urgent:

It once was rumored that Hyundai Electronics Industries (HEI) was on the verge of dishonor due to a liquidity crisis, but it seems to be over. It is because the Korea Development Bank (KDB) has decided to accept corporate debentures totaling 1.2 trillion won that come to maturity at the end of March, and creditor banks have also increased their limit on export exchange draft to US$6billion.

¡°Supposing that KDB continues to accept its corporate bonds, HEI could tide over the liquidity problem on the condition that it will turn out business profit of 800 billion won,¡± analyst Jeong Chang-Won of Daewoo Securities said. ¡°But the problem is whether the company can survive or not as a profitable one.¡±

At present the company¡¯s business profitability is far below 20 percent of Samsung Electronics. Moreover, in order to narrow the gap between the two companies, HEI is badly in need of research and development investment and facility investment. However, the company can do nothing but reduce debts.

¡°Without solving the problem of overproduction, excessively high debt ratio, and low profitability, the matter of HEI seems to remain unchanged,¡± the president of Hana Alliantz Trust Management said. ¡°If the company doesn¡¯t carry out thorough restructuring and break through the problem of low profitability, next year will be more difficult.¡±

3. Hyundai Investment Trust and Securities: Selling is a sole way for the normalization of management

Hyundai Investment Trust and Securities (HTS) is called a nuclear bomb in the securities circle. Normalization of HTS management has yet to be known, and, in case of its failure to do so, it is expected to deal a serious blow to the financial market.

The equity capital of HTS, which excluded total debts from total assets, came to negative-1.2727 trillion won at the end of September last year. It includes 3.1 trillion won in the linked call loan that HTS borrowed from its customers¡¯ trust accounts. HTS is required reduce the volume to 1.6 trillion won before the end of February.

HTS, which needs 1.4 trillion won, is pushing ahead with using the stocks of Hyundai Information Technology, Hyundai Logistics, and Hyundai Autonet that Hyundai affiliates offered as collateral as the money for the capital increase after appraising the stock value as 240 billion won. As customers continue withdrawing deposits, the total deposits at HTS decreased by 498.5 billion won from 17.6606 trillion won at the end of last year to 17.1621 trillion won as of Jan. 30.

As HTS is unable to pay back the remaining 1.16 trillion won through its normal business operation, the only hope is the purchase of HTS by AIG of the United States. AIG recently submitted an investment proposal, which states that AIG will invest 1.1 trillion won and the Seoul government will make up for the remaining amount in a form of a capital increase for HTS¡¯s normalization.

As conditions for the joint investment, AIG is known to have requested the five-year maturity extension of securities finance bonds, a 3.5 percent cut in its coupon rate (6.5-3 percent), and the repayment guarantee on the fund of collateralized bond obligation (CBO) floated by HTS.

However, the government is unlikely to accept the AIG proposal easily, as it earlier suffered huge losses in the course of selling off Korea First Bank in the way similar to that proposed by AIG. As a result, they are likely to face rough going in the negotiations.

Park Hyeon-Jin witness@donga.com