Creditors` last-ditch efforts for HEC recovery

1. Creditors convert loans into equity

Korea Exchange Bank and other creditors belatedly recognized that there is no other way than converting the loans they offered to Hyundai Engineering and Construction (HEC) into equity.

On Nov. 3, 2000, when the government announced the policy on how to handle large corporations with potential insolvency, HEC was classified as one of the companies that could survive. In just four months HEC is classified as a normal firm, however, creditors found it is inevitable to convert the loans into equity. It is pointed out that there was a problem in the assessment at that time.

Creditors said HEC can hardly survive unless the company slashes its 4.5 trillion won debt to less than 3.5 trillion won. They analyzed that HEC could survive if it cuts its debt to a reasonable level through conversion of loans into equity so that it could pay the principal and interest with operating profits. Officials of the Financial Supervisory Commission said that debt-for-equity swaps were the only solution to the question since liquidation of HEC would have a great impact on the financial market.

It was inevitable since the company was found to have incurred a loss of 2.9 trillion won as a result of independent auditing by Samil Accounting Corp. Samil appropriated 536.3 billion won as appraisal loss in outstanding amount from construction work in Iraq, 530 billion won in uncollected amount from domestic and overseas work, 410 billion won in appraisal loss from securities investments, 426 billion won in appraisal loss from purchase of construction materials, 570 billion won in repair work for construction and 500 billion won in other losses.

However, Samil suggested a `limited` or `refusal for comment` is hampering the conversion of loans into equity by creditors. If the auditor`s opinion is negative, the company could be excluded from the list of companies for prompt acquisition of corporate bonds. Officials of Korea Development Bank said that the auditor`s opinion has no direct relation with the selection of companies that are subject to acquisition of corporate bonds. But they noted that it could be controversial. It means that some creditors could oppose the idea of acquiring bonds of the company.

Once the equity investment is made, creditors would become the leading shareholder of HEC. Then, Chung`s family would be deprived of the right of HEC`s management. Creditors are also expected to fire HEC president Kim Yoon-Kyu and vice president Kim Jae-Soo.

Hyundai Group`s structure will change as HEC is to be separated from the group. As HEC, the holding company of the group, is to be separated from the group, Hyundai Merchant Marine will emerge as the group`s holding company. Chung Mong-Hun, chairman of Hyundai Asan will maintain control over the group`s affiliates except HEC.

However, the decision may not avoid criticism that it is a policy favorable to the large corporation. Also, it is lacking the principle of equity compared with Dong-Ah Construction, which will be liquidated, or Woobang Housing and Const., which is now taking procedure for court receivership. It is because the approach to Hyundai is different from the criteria set by Nov. 3 measure regarding insolvent companies.

By Hong Chan-Sun, Lee Hoon

2. Gains and losses of creditors

What about gains and losses of creditors if they convert loans into equity investment in Hyundai Engineering and Construction (HEC)?

In short term, it would have a great impact on local banks. They cannot collect interest for the amount that is converted into equity. Also, it would result in falling of their stock prices, thus they would suffer from appraisal loss in securities. What is more, they are required to provide fresh loans to HEC as they have decided to keep the company afloat.

As the end of last year, the combined loans provided to HEC by the nation`s eight major banks, including Korea Exchange Bank (KEB), amounted to 1.14 trillion won. Of the total, KEB would be the most burdensome since it already provided 432.5 billion won to the ailing Hyundai company. In addition, KEB classified loans to Hyundai as `normal` so it hasn`t set aside enough bad debt reserve.

Hanvit Bank provided 218.2 billion won and set aside 76.4 billion won as bad debt reserve. Kookmin Bank and Hana Bank also provided 131.9 billion won and 122.2 billion, respectively.

Park Young-Hwan, researcher at Daewoo Securities, analyzed that Hyundai will be able to survive if it could reduce its debt by as much as 1 trillion won to lessen its interest payment burden.

On the other hand, bank analysts of other securities firms pointed out that the conversion of debt into equity should be around 2 trillion won to cut its debt to less than 3 trillion won, noting that the conversion of about 1 trillion won would only result in additional burden to creditor banks.

By Hong Chan-Sun