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  March 10,  

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The Koreas

Dong Ah Construction is thrown to the dogs

By Louis Hau

SEOUL - A Seoul bankruptcy court's decision on Friday to strip one of South Korea's largest construction companies of court-receivership status was widely expected and isn't being viewed as a sign of a significant revival of the country's flagging corporate restructuring efforts.

The company in question, Dong Ah Construction Industrial Co, was placed under court receivership last November after being in a debt-workout program since September 1998. The Seoul court's decision appeared all but inevitable to most observers given Dong Ah's continued inability to pay off massive debts owed to its creditors, as well as a local accounting firm's opinion in February that it would cost less to liquidate the company than to keep it operating, and recent revelations that Dong Ah had used fraudulent accounting methods for the past 10 years.

If Dong Ah were to be liquidated, as is now widely expected, it would become one of South Korea's largest-ever corporate failures. The news follows the announcement on Monday by a smaller construction company, Hyundai Group unit Korea Industrial Development Co, that it would seek court protection from its creditors after failing to pay off 7.9 billion won (US$6.2 million) of commercial paper last week.

But observers said it would be premature to interpret these developments as a sign that the South Korean government is adopting a new get-tough stance with corporate debtors.

Indeed, the government itself appeared to be in two minds on the fate of Dong Ah, due in large part to the company's significant business interests overseas. On February 8, an official from the Ministry of Construction and Transportation said during a National Assembly hearing that the government had asked the Seoul court to postpone the potential liquidation of Dong Ah due to fears that the company's liquidation would bring a halt to a multibillion-dollar waterway project it was completing in Libya. That, in turn, could hurt the international credibility of Korean construction companies, the official said.

A week and a half later, the Construction Ministry appealed to the court to keep Dong Ah under court receivership for the sake of the completion of the Libyan waterway project.

But the day after the Construction Ministry official's testimony at the National Assembly, Deputy Prime Minister and Minister of Finance and Economy Jin Nyum said in a radio interview that Dong Ah's liquidation was "the right direction", adding, however, that the government would try to push for the separate completion of the Libyan project.

Neither Dong Ah's impending liquidation nor Korea Industrial Development's seeking of court receivership have erased doubts among many observers over the South Korean government's commitment to more significant corporate reforms later this year.

Such doubts were most recently revived by a decision last week by Korea Exchange Bank, which is partly owned by the government, to guarantee $400 million in foreign loans for ailing Hyundai Engineering & Construction Co, the country's largest construction company, on condition that creditors swap the company's remaining debt for equity in the event of a further worsening of its financial condition.

That decision followed state-run Korea Development Bank's controversial announcement in January that it would help roll over a large portion of debt owed by some of the country's most prominent corporate debtors, including Hyundai Electronics Industries Co, one of the world's largest manufacturers of semiconductor chips.

Bill Hunsaker, head of research at ING Barings in Seoul, says the Dong Ah court decision appears to be part of what the Korean government has been claiming will be a greater emphasis on what it calls "market-driven" reforms. "This is the early stage of market-driven reforms," Hunsaker says. "From that point of view, it's good."

But he adds that the government appears to be pursuing a two-track policy on such reforms. "What it implies is that companies not perceived to be essential to the overall economy will be allowed to fail whereas those that are deemed essential, such as Hyundai Electronics and Hyundai Engineering, will be supported," Hunsaker says.

Finance Minister Jin said in February that the Korean government would expedite plans to sell off its stakes in nationalized banks and that it would streamline local bankruptcy laws, steps that could conceivably aid market-led reforms, Hunsaker says.

The court's decision to remove Dong Ah from court receivership appears to be "an economic decision rather than a political decision", says Kim Chul-beom, head of research at Nomura Securities in Seoul. "After three years, they finally realized that the company doesn't have value as a going concern."

While most observers expected Friday's court decision on Dong Ah, Kim argues it wasn't necessarily a given, considering the political sensitivity of letting any construction company go under. "If you invest a hundred dollars, a construction company will generate the most jobs," he says.

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