How so? Well, ironically, itÆs largely thanks to the 1997 financial crisis. This was a period when many major Korean corporate groups û better known as chaebol û faced financial distress. The Korean banks were left holding the problem loans and after a debt restructuring ended up holding equity in many of these firms. Perhaps the best known example is semiconductor company, Hynix but other major holdings included Hyundai Engineering & Construction, Hyundai Corp, Daewoo Engineering & Construction, Daewoo Shipbuilding and Daewoo International. Then, in subsequent problem periods û the credit card debacle and a crisis at the SK chaebol û they also picked up equity in LG Card and SK Networks.
In a curious piece of alchemy, these assets have turned to gold. Partly, this was thanks to the swift recovery of KoreaÆs economy. But restructurings at the distressed companies themselves, led to a turnaround in these firmsÆ fortunes. By last year it became evident to the Korean creditor banks that these equity stakes were becoming increasingly valuable. Towards the end of 2005 and throughout this year they have sold stakes for enormous profits û and this process is likely to continue for a couple more years.
This is something that bank analysts have begun to pick up on. CLSAÆs Korean banks analyst, Shaun Cochran calculates that the value of these stakes amounts to W8 trillion ($8.6 billion). In a mid-October research report by Philippa Rogers of Goldman Sachs, she calculates the value of the seven major stakes too (see table below). Rogers writes: ôWe estimate that the sale of these seven securities, at current market value [minus their original book value of W2.3 trillion], would add W8.5 trillion in non-operating gains to the P&L [profit and loss]. To put this in context, the potential gain to be booked through the P&L amounts to 24% of operating profits in 2007 and 30% in 2008. The gain would also add an estimated 5% to the current book value of the banks.ö
Goldman banker David Chung û whose expertise in the Korean financial sector dates back to the late nineties when the US investment bank bought an equity stake in Kookmin Bank û is quick to praise the local banks. ôTheir ability to manage these bad credits has been quite skillful and competent,ö he says.
GRAVE SITUATION
Of course, the mother of all æbad debtÆ investments has turned out to be Hynix. Back in 2001 this magazine ran a cover story on Hynix which featured a hand grappling to emerge from a grave. It pretty much summed up the feeling. The majority of informed and uninformed opinion believed that Hynix was a dud company simply being kept alive by the Korean state for want of any better ideas.
What has transpired has had many experts eating their microchips. In a miraculous turnaround, Hynix has returned to financial and technological strength, and seen its stock price recover from a low of W2,835 to a recent high of W40,100.
The story of this turnaround deserves to be told at length û especially since it epitomises the ælead to goldÆ trend that this article is describing. And who better to describe it than KEBÆs chairman, Robert Fallon, who played an important role in HynixÆs recovery.
KEB was HynixÆs biggest creditor, and that gave Fallon an extremely important role as chairman of the creditor committee. It turned out he was the right man at the right time. The American had previously ran the Asian operations of Chase Manhattan and could be justly labelled an old Asia hand û given he had resided in the region for 31 years. This was a man who had climbed the highest mountain in Antartica, Mount Vinson. But the scaling of HynixÆs debt mountain may well stick in his mind as his crowning mountaineering achievement.
ôAt the end of 2003 I was aghast at the amount of NPLs at KEB that were still troublesome,ö says Fallon, who was hired from Columbia Business School to become KEBÆs president and chairman. ôThe bank had $3 billion of NPLs, and KEB Card was going bankrupt.ö
Chief among those NPLs was Hynix, which was part of the Hyundai chaebol. ôIn 1997 KEB was the largest private sector bank and lead bank to the Hyundai chaebol. Hyundai Group had liquidity problems and had no means to repay their obligations. Hynix was particularly badly hit û as too was Hyundai Engineering & Construction. They had to be recapped and the creditors took over.ö
Fortunately, Fallon knew Hynix and its business pretty well. ôI was head of Chase in Asia when we financed their first US fab in 1996,ö he says. He recognised that many of HynixÆs problems were not of its own making. In 1999, Hynix was created when the government forced Hyundai Semiconductor to take over LG Semiconductor. Hyundai Semiconductor was doing reasonably well but taking on all the LG Semi debt was tantamount to paying an extraordinary price to book value. ôThere was almost $13.5 billion of debt and it was done at 5 times book value,ö says Fallon.
In 2000 this led to a loss of W2.5 trillion, and in the next two years a debt restructuring. About $7 billion was either forgiven or completely written off. KEB was the largest single creditor with a total exposure of W1.3 trillion. It wrote off over $1 billion (W1,014 billion), so that after the restructuring its outstanding Hynix debt was W0.3 trillion. Some of this was swapped into equity and it got a 13.87% stake in Hynix. hat The net result was that Hynix was left with debt of $3.7 billion.
ôIn June 2003, Hynix had 14 straight quarters of losses. So you are taking a bet that the core business can survive,ö says Fallon, who adds, ôKEB worked very closely with Hynix over the past three years on its restructuring.ö KEB installed senior staff at Hynix, and was proactive in managing the 127 creditors. In fact, it was KEB, as chairman of the creditor council, that was instrumental in drawing up the six point turnaround plan.
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