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Business Buzz
The Crumbling Chaebol

Bankers are breaking out in a sweat over speculation that South Korea's biggest chaebol may be dismembered. Several Hyundai group companies have been late in paying suppliers, subcontractors and even employees. The credit crunch recalls the problems at Daewoo, Korea's second-largest conglomerate, which collapsed last year with over $80 billion in debt. Daewoo creditors are likely to get back just 20 cents on every dollar they lent.

Just how bad off is Hyundai? Analysts and credit-rating agencies point out that Hyundai's debt-to-equity ratio of 2.29 times is nowhere near Daewoo's $4 in loans for every $1 in equity. And some of Hyundai's businesses, like cars and electronics, are doing well enough. But, just like Daewoo, decades of lax regulation in pre-Crisis South Korea has resulted in a web of interlocking debt that will be near impossible to unravel. The various Hyundai companies are linked by equity stakes and intra-group lending. The more profitable companies lent money at sweetheart terms to cash-strapped affiliates. It was a system that worked well during the good times.

But now that cozy system is unraveling. Last week, shipbuilder Hyundai Heavy Industries sued semiconductor chipmaker Hyundai Electronics Industries and brokerage Hyundai Securities, charging that it suffered a loss of $220 million because of loan guarantees it provided for them. This may be the first of many suits — Hyundai companies are run by different, and sometimes feuding, sons or nephews of octogenarian founder Chung Ju Yung. Another of the chaebol's companies is also under heavy pressure. Hyundai Engineering & Construction needs several hundred million dollars to pay its subcontractors.

Worse, nearly half the conglomerate's $5-billion debt will fall due within six months. Hyundai Construction has a lot of accounts receivable, but it is not likely to collect on most of them. A major debtor, the government of Iraq, promises to pay $1.2 billion it owes when its assets in the West are unfrozen and sanctions against it are lifted.

— By Assif Shameen

Write to Asiaweek at

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