[EDITORIAL] Hyundai: Stop and Think First

The government still does not fully understood the core issues involved in Hyundai Engineering and Construction Co.'s problems. The government and Hyundai's creditors are considering converting the company's debt to equity because Hyundai's debts exceed its assets by 900 billion won ($687 million) because of huge losses last year, mainly due to debt servicing. The government said flatly that it will save Hyundai and a debt-to-equity swap is only way to do so. Jin Nyum, the finance minister, said Hyundai shows an operating profit, unlike Dong-Ah Construction, and so Hyundai should be saved. Though the reasoning is understandable, the government's handling of Hyundai was flawed from the start. Only if it is certain that the debt-equity swap will save Hyundai and the national economy will be spared more damage should it go ahead. If Hyundai's situation deteriorates again, Korea's losses will balloon.

The government started pouring money into Hyundai without carefully analyzing its financial and managerial structure, evaluating its managers, forecasting the construction market and especially ensuring that fundamental changes are made in the firm. The due-diligence audit that should have begun long ago started only 10 days ago. The only rationale that the government gave for Hyundai's ability to survive is its net operating income. Especially while construction companies are suspected of manipulating their books, an alleged profit is not enough to restore market confidence. By clinging to the profit argument, the government opened itself to accusations that its support of Hyundai is unconditional.

The government is about to repeat the same mistake; even before the results of the audit are in hand, the government is touting the debt-to-equity swap. The decision on the swap should be based on the result of the audit, and if operating losses are found or the firm's chances of survival are low, it would be wiser to liquidate Hyundai.

A swap is only a necessary, not sufficient, condition for Hyundai's survival, so management and operations reforms should be examined too. When all above-mentioned conditions are met, only then will the market accept a debt-to-equity swap promoted by the government and banks.