Wed, Aug 29, 2001 page21

• Hynix seeks US$2.7bn bailout package

  MONEY TROUBLES The South Korean government is highly unlikely to kill off 15,000 jobs, 4 percent of the nation's exports and a significant portfolio of bad loans

  • BLOOMBERG
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  Hynix Semiconductor Inc sought a 3.5 trillion won (US$2.7 billion) bailout from creditors and investors, its second in three months, to stay in business after chip prices failed to rise above production costs.

  The No. 3 memory chipmaker wants to sell 500 billion won of new stock to shareholders and swap 1 trillion won in debt for stock, said Korea Exchange Bank, the main creditor. Banks would swap 2 trillion won more debt for bonds convertible for Hynix stock.

  While the funds would help Hynix halve interest-bearing debt, investors may balk because the company's stock fell 75 percent since it sold US$1.25 billion of stock overseas in June. Hynix, which lost US$1.6 billion in the first half, needs cash because the price of its memory chips fell 38 percent since the previous bailout and show few signs of recovery.

  "As an investor I am not interested in buying anything from these guys," said Yvonne Leung, who oversees technology investments at Towry Law (Asia) Ltd in Hong Kong. "The whole episode is a bad reflection on Korea and its plans to fix its failing industries."

  Hynix is battling to stay alive in a US$30 billion industry whose sales are forecast to drop as much as 40 percent this year.

  Success or failure for memory chipmakers is measured in hairs- width slivers as they spend billions of dollars to squeeze more chips out of the same size piece of silicon.

  Like the June sale, part of a US$4 billion bailout, the plan announced today is being arranged by Salomon Smith Barney Inc, the company's financial adviser. The measures are among the most likely to occur, said Chung Hyung Ryang, KEB's head of corporate credit risk assessment.

  In addition, Korean investment trust companies may be asked to extend the maturity of about 1.2 trillion won of three-year bonds maturing since August. The length of the extension hasn't been decided, he said. Creditors will meet tomorrow to discuss the bailout and the proposed rollover.

  The Korean government helped create many of the problems now faced by Hynix by forcing Hyundai Electronics Industries Co to take over LG Semiconductor Inc in 1999. The shotgun marriage aimed to increase efficiency by merging two units of Korea's big industrial conglomerates -- Hyundai Group and LG Group -- in the wake of the nation's financial crisis.

  Instead, the decision produced a company that now accounts for about 4 percent of Korean exports and employs some 15,000 people just as the price of industry-standard 64Mb DRAM chip plummeted. The chips, which now sell for as little as US$0.75, down from almost US$9 in June 2000, cost an estimated US$1.50 to make.

  Because of its size and importance to the economy, the Korean government has been accused by foreign rivals of forcing creditors, many of which are controlled by the state, to keep Hynix alive. Its debt now equals more than seven times the company's market value and Salomon expects sales to halve to 4.4 trillion won this year.

  "In a normal environment, you might expect creditors to pull the plug on a company hemorrhaging this much cash," Richard Evans, who helps manage US$1 billion of Asian stocks at Gartmore Investment Management, said last week. "However, Hynix represents a meaningful proportion of Korea's economic activity and by the same token a meaningful part of the domestic banking sector loanbook."

  The outlook isn't improving. Samsung Electronics Co, which will spend 10 times more than Hynix this year on new equipment and is the only maker still profitable, said last month it will focus on limiting losses for the rest of this year.

  Hynix needs to repay debts that drain a third of its operating income to remain competitive. Salomon forecast in mid-May, before the share sale that it arranged, that the decline in chip prices would slow by the end of June and that there would be a "modest recovery" by September.

  For your information

  Digging a deep hole

  * Hynix Semiconductor wants to sell 500 billion won of new stock to shareholders. * The company also wants to swap 1 trillion won in debt for stock. * Investors may balk because the company's stock has fallen 75 percent since it sold US$1.25 billion of stock overseas in June.
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