Background of fresh capital injection into HEC

The Korean government has concluded to convert loans into equity investment and provide fresh loans to Hyundai Engineering and Construction (HEC), which is considered as a percussion cap of the Korean economy. The final decision has to be seen since creditors are scheduled to have a meeting to discuss the question in the morning on Mar. 29. However, it is the general trend to keep HEC stay afloat. Some contended that HEC has to be placed under court receivership by sticking to the market principle. But the reality calls for helping HEC to survive at a time when the nation`s economy is experiencing a slowdown in growth.

At the economic ministers` meeting held on Wednesday, there were mixed views about the question of HEC. But they made the conclusion to keep HEC afloat.

Still, the government, unlike in the past, said that it will leave handling of HEC to the hands of creditors. It is believed that the government intends to minimize complaints that may arise in the process of providing financial aid to HEC as well as converting loans into equity investment in the company by allowing them to make a voluntary decision on the question.

Some creditors are opposed to the idea since they need to provide 1-2 trillion won of fresh loans to HEC, noting that it is burdensome to them. They claimed that they could work out the best solution to the HEC question by placing the company under court receivership first to reduce their financial burden. However, HEC`s external credibility would be severely deteriorated if the company is placed under court receivership, thus ruining its basis for overseas construction activities. For this reason, both the government and HEC strongly oppose the idea. In fact, the government reportedly found that the perception that court receivership is equivalent to corporate failure is quite burdensome.

The government was unable to force creditors to follow its position as it could trigger a controversy of offering a preference to HEC. Deputy Prime Minister Jin Nyum and other high-ranking government officials stressed that the final decision will be made by creditors, although the government has a policy goal of its own.

Despite the various government efforts to keep HEC afloat, there is mounting criticism about the perception of both the government and creditors since HEC is found to be unable to survive independently.

When the question of HEC surfaced last year, the government considered three approaches of independent survival, conversion of bank loans into equity investment and court receivership. But it is true that the government did stick to the possibility of survival independently.

Government officials emphasize that they succeeded in leading HEC to work out a self-rescue plan, including sale of the massive Sosan farmland, and realizing personal investment into Hyundai Group by former honorary chairman Chung Ju-Yung. Out of the group`s 748.5 billion won target for fund-raising as it promised to the creditors, the group raised only 38.4 billion by the end of February.

Meanwhile, it would be inevitable to reduce HEC`s capital and to deprive the right of management from the current large shareholders as creditors have decided to convert their loans into equity investment in HEC. In fact, the creditors have made it clear that the current management has to retire. They want to form new management with new figures, although they didn`t rule out the possibility of selecting HEC executives for its management. In this case, former presidents Lee Nae-Heun or Shim Hyun-Young, and vice president Uh Choong-Jo could be among the candidates for president of the company. In particular, creditors are expected to name Chung Mong-Hun, chairman of Hyundai Asan, as chairman of HEC so that the company could demonstrate the continuity of the company to overseas clients.

Now, the question is if HEC would recover completely with about 3 trillion won of fresh loans. Last year, HEC`s operating profit was as little as 200 billion won, which is only a half of its financing costs.

Its total debt would be slashed to the 3 trillion won level through massive conversion of loans into equity investment. However, its financing cost is estimated at around 300-500 billion won. So, the key for HEC`s recovery is whether HEC will be able to pay its financing costs with the operating profits.

Kwon Soon-Hwal shkwon@donga.com