Impaired Capital at Hyundai Corporation, Solutions

Following the SK Global scandal, Hyundai Corporation, one of Korea’s largest conglomerates, turned out to have impaired capital. Creditor banks are expected to swap their debts with equity.

Hyundai Corporation reported in the preliminary closing that it registered a 7.1 billion won surplus. However, the company reported a 89.8 billion won deficit in the end due to hidden debt found in the auditing process.

The deficit rose to 154.4 billion won by transferring an additional 57.5 billion won for guaranteeing local corporations in the loss. The company also raised suspicions because it reported only 780 billion won of total losses in financial statements despite its 880 billion won debt from financial institutions.

Its major creditor Woori Bank said, “Total debts of the company from financial institutions reached 880 billion won including CBO`s worth 110 billion won.” Woori Bank, Korea Exchange Bank, Korea Development Bank, Cho Hung Bank, the Export-Import Bank of Korea, NongHyup and Korea Credit Guarantee Fund are its creditors.

However, total debts of the company amounted to 780.1 billion won including trade payables worth 448.1 billion won in the 2002 audit report conducted by Ernst & Young Korea. Hyundai Corporation denied suspicions that it had hid its debts from financial institutions.

Creditor banks decided that they would extend all 880 billion won in debts from financial institutions to the end of June and maintain its current credit level on trade-related matters.

They selected Samjung KPMG for actual inspection of the company to decide whether the company is viable or not. Samjung KPMG will submit its report on the company by mid-May.

Samjung KPMG will evaluate Hyundai Corporation’s going concern and liquidation value. If the going concern value is higher than the liquidation value, creditors will take measures including a debt-equity swap to revive the company. Otherwise, the company will be submitted to court management or liquidation procedures.

An official at a creditor bank said, “It is hard to liquidate the company in this situation, so the company is likely to be submitted to the Restructuring Act and collective management by companies such as SK Global.”

:Primary CBO (Primary Collateralized Bond Obligation): Liquidity-specialized firms issue primary CBO`s based on corporate bonds acquired by securities firms. Companies with low credit ratings raise funds collaterally with primary CBO`s.

Mi-Kyung Jung Do-Young Kim mickey@donga.com nirvana1@donga.com