After months of a serious cash crunch, Hyundai Engineering and Construction Co., an arm of the giant Hyundai group, defaulted on payment of 22.4 billion won (dlrs 20 million) in commercial notes that were due on Monday.
Hyundai said it made full payments of notes and other due debts Tuesday afternoon. If it had failed to do so by the close of business Tuesday, it would have been declared bankrupt.
Also on Tuesday, Dong Ah Construction and Industrial Co., the nation's fifth largest builder, planned to seek court receivership after its creditors refused fresh loans.
The problem facing the two firms was bad news for their creditor banks and subcontractors. But it was welcome news for investors who have had strong doubts about many financially unstable firms listed on the stock exchange.
South Korea's stock market has been weak for most of the year with investors persistently on edge. The stock index fell from about 1,000 points to 500 over 10 months.
In order to clear investor doubts, the government has promised to conclude financial and corporate reforms by year's end. That requires the government-controlled creditor banks to identify all financially weak firms that should be expelled.
Dong Ah was the first such firm that has been ostracized by its creditor banks.
Dong Ah's government-controlled creditors believed that even with new large loans, the builder has little chance of survival.
At the end of June, Dong Ah had dlrs 3.3 billion in debts against its estimated assets of dlrs 3.9 billion. It lost dlrs 563 million in the first half of this year.
Analysts welcomed the decision against Dong Ah, saying it is a good sign for the nation's corporate reforms and would help boost investor confidence in the economy as a whole.
"It means a big, but weak company is being liquidated. The markets see it as a positive development," said Yun Seok, head of research at CS First Boston in Seoul.
He said the move would have an initial negative impact such as possible bankruptcies of subcontractors, but not to the markets because watchers have been expecting the move.
Dong Ah has about 200 projects in progress, including 21 abroad worth dlrs 7.4 billion.
Dong Ah is the prime contractor of Libya's multibillion dollar Great Man-made River Project to build underground irrigation channels across the country.
It completed the first-stage of the waterway worth dlrs 3.7 billion in 1991. The dlrs 6.7 billion second-stage project, launched in 1990, is due to be completed next year.
For the third-phase project worth dlrs 5 billion, the South Korean firm has formed a consortium with the Libyan government.
A typical South Korean conglomerate, Dong Ah has recklessly expended during the nation's boom years in the 1980s and early 1990s with cheap bank loans.
It faced serious liquidity problems when the economy was hit by a financial crisis in late 1997. It was placed under a debt workout program by creditor banks in 1998.
Local media said Dong Ah failed to earn trust from creditors because of the disclosure of more hidden debts and internal management disputes.
(AP)