(EDITORIAL from the Chosun Ilbo on Jan. 4)

The Lessons from Kumho Asiana's Hard Landing

Kumho Asiana Group, Korea's eighth-largest conglomerate, has decided to put two
of its flagship units under a creditor-led debt workout program.

Kumho Industrial
and Kumho Tire will undergo capital reduction and have their debt transformed
into equity as they fall under creditor control. Major shareholders of the two
companies said they will take responsibility for the mistakes and offered to
contribute their own wealth, including shares, to help improve cash flow.
Kumho Petrochemical and Asiana Airlines, which are the holding companies of Kumho
Asiana Group, will independently pursue steps to return to profitability,
allowing the conglomerate to maintain control of the entire group for now. But if
the restructuring is deemed inadequate, Kumho Petrochemical will be placed under
creditor control, and that would mean a revolution in the conglomerate's
ownership structure.
A failed strategy to expand via highly-leveraged corporate acquisitions is to
blame for the crisis. Kumho jumped from Korea's 11th-largest to its
eighth-largest business group after acquiring a 72.1 percent stake in Daewoo
Engineering & Construction in 2006 for W6.4 trillion (US$1=W1,165) and buying
Korea Express for W4.1 trillion last year. Kumho borrowed W3.5 trillion from no
fewer than 18 different lenders to finance those acquisitions. It offered a 39.6
percent stake in Daewoo as collateral to creditors and even signed a put-back
option binding it to repurchase the stake at W31,500 per share if the stock price
falls below that level by the end of this year. Now Daewoo's share price stands
at around W12,000, which means Kumho has to repay more than W4 trillion. That is
why the conglomerate suffered from rumors of a cash crunch all year long.
Kumho finally sought to deal with its problems by attempting to sell Daewoo in
June. But that failed, and in the middle of the crisis, two brothers in the
founding family were engaged in a nasty spat over management control, fueling
distrust among creditors. In the end, the highly-leveraged expansion and a
failure to pre-empt the situation pushed Kumho to the edge of the cliff. This
should serve as a cautionary tale to other conglomerates seeking to expand
without having the money.
Now Kumho and its creditors must join hands and use every means possible to save
the conglomerate and protect its jobs through debt-for-equity swaps and other
measures. If necessary, the government should offer help through financial
assistance.
(END)