Korean chaebol haunted by ailing builders

2013-04-22 17:28

Chaebol haunted by ailing builders

By Kim Tae-jong

The nation’s major conglomerates, known here as chaebol, are facing a dilemma due to their cash-strapped construction arms.

On the one hand, they can’t simply let their troubled affiliates collapse because they would face strong criticism of acting irresponsibly. On the other, it is not easy to provide financial support as that could have a negative impact on the financial health of the entire group.

“It’s true that there is skepticism on the V-shaped rebound of the construction industry here,” said Park Hyung-ryul, an analyst at KDB Securities. “So it is obviously a burden for parent groups to take steps to revive a troubled construction arm.”

Construction firms have suffered major setbacks in recent years amid a prolonged slump in the local housing market and low overseas demand, which consequently led many of them to face liquidity crises.The sluggish industry has led dozens of Korean construction firms to be placed under either debt workout programs or court receivership. Some are affiliated with the country’s major conglomerates, such as LIG Group and Woongjin Group.

When LIG E&C filed for court receivership due to financial difficulties last year, its parent LIG Group faced mounting criticism of its lack of rescue efforts.

The group was later investigated over allegations that its chief illegally issued huge sums of commercial paper under the name of the construction subsidiary right before it filed for court receivership.

Despite financial burdens, however, most groups seem to take the risk of injecting capital into their construction affiliates to save them from going bankrupt.

One of the most recent examples is the Halla Group, which recently bought new shares issued by its cash-strapped construction arm Halla Engineering & Construction (E&C) through another subsidiary, Mando.

The Doosan Group also injected 1 trillion won into troubled Doosan E&C through another affiliate, Doosan Heavy Industry.

The groups claimed those were inevitable decisions as part of rescue plans, but industry watchers said such parent company’s support could deal a blow to the group’s overall financial health.

In the case of Halla, the group is facing a lawsuit as well as strong criticism from Mando’s minority shareholders, who argue that it damaged their rights.

“It can be wrong for a group to save an affiliate by risking the health of a cash-cow subsidiary,” Yoo Deok-sang, an analyst at Dongbu Securities, said. “Groups should be more careful in risk management and come up with decisions that do not go against shareholders’ expectations.”

Market insiders also noted that another Woongjin Group case could happen.

The group technically collapsed after Kukdong E&C, its construction affiliate, went belly up after it failed to honor commercial paper worth 15 billion won. The bankruptcy was a severe blow to the group, which was already suffering a liquidity shortage.

Woongjin Holdings also filed for court receivership, saying it was the only option available to save the entire group.

Such serial collapses can happen again, because many chaebol owners have large stakes in their construction arms or affiliates in a cross-shareholding relationship. Therefore, the groups have little choice but to support the affiliates, even though it could affect other affiliates’ financial soundness.

As of the end of last year, Dongbu Group Chairman Kim Jun-ki had a 30.59-percent stake in its construction arm, Dongbu E&C. GS Group Chairman Huh Chang-soo had an 11.8-percent stake in GS E&C.

Doosan Heavy Industry has a 72.74-percent stake in Doosan E&C. Hyundai Motor, Kia Motors and Hyundai Mobis are major shareholders of Hyundai E&C, with 20.93-percent, 5.23-percent and 8.72-percent stakes, respectively, in the construction affiliate.