SEOUL: South Korea's ailing Daewoo Motor, a former symbol of the nation's economic expansion that ended up on the auction block, faced bankruptcy Tuesday. Creditors said a possible selloff of Daewoo Motors to General Motors of the United States could be delayed if the South Korean carmaker is put under court receivership. The crisis, as well as turmoil at cash-strapped Hyundai Engineering and Construction, the nation's biggest builder, have strained government efforts to restore sagging investor confidence in its economy with corporate reforms.
Daewoo, which has been running on emergency bank funds, defaulted on 44.5 billion won ($40 million) in commercial papers on Monday. In South Korea, a company goes bankrupt if it fails to honour its commercial papers for two straight days. Daewoo, which planned an announcement later Tuesday, has been on a debt-workout program since July last year. Last week, creditors stopped an infusion of new funds unless its labour union accepts the dismissal of 18 percent of its 18,000 workers.
The company called a last-minute meeting with the union for Tuesday afternoon to avert the crisis, but the union said it would not accept job cuts. "Without funds from creditor banks, the company cannot survive even a day," said Lee Sung-sang, a Daewoo business director. Lee said the company has $155 million in commercial papers due this week but it has no financial resources to honour them.
If Daewoo Motors goes bankrupt, it is expected to be put under court receivership - a procedure that will install new management and freeze all company debts. Court receivership could cause Daewoo's 250 main subcontractors to collapse in a chain reaction. Some auto analysts said court receivership may help overhaul the inefficient carmaker ahead of a buyout by General Motors. The American firm has been in negotiations to purchase the firm since September.
"Court receivership would make it easier to restructure the company and win back confidence from the market. Thus, it will be easier to sell Daewoo to GM," said Suh Sung-moon of ING Baring Securities. Analysts noted that South Korea's two other once-troubled car firms - Kia Motors and Samsung Motors - were sold to Hyundai Motor and Renault of France respectively after being put under court receivership.
But they said creditors could be at a disadvantage in negotiations with GM, which may try to lower its price to purchase a bankrupt Daewoo. GM entered the race to acquire Daewoo after Ford Motor abruptly withdrew from negotiations in September. In a hotly contested bidding early this year, GM reportedly offered a purchasing price of between $4 billion and $5 billion.
Although heavily indebted, Daewoo could provide an easy way for foreign auto giants to crack open South Korea's virtually closed car market and serve as a stepping stone into nearby China, one of the fastest-growing car markets in Asia. Daewoo has the capacity to make 2 million vehicles a year at home and abroad.
Hyundai Engineering barely escaped bankruptcy last week. Now, it has to survive on its own resources, with government-controlled creditors refusing to provide new loans. Bank officials said Hyundai Engineering has $1.4 billion due in commercial notes by year's end but it can muster only $1 billion to cover them.
To avoid the huge impact the builder's collapse may have on South Korea's economy, creditors over the weekend asked Hyundai Engineering's owner, Chung Mong-hun, to agree to capital reduction and a debt-for-equity swap. Chung reportedly rejected the demand.
