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S&P: Hyundai Semiconductor America Stays on CreditWatch Negative

4 September 1998

S&P: Hyundai Semiconductor America Stays on CreditWatch Negative

    TOKYO, Sept. 4 -- Standard & Poor's today announced that its
single-'B' long-term debt rating of Hyundai Semiconductor America Inc. (HSA)
would remain on CreditWatch with negative implications, where it was placed on
Dec. 9, 1997.  HSA's parent, Hyundai Electronics Industries Co. Ltd., intends
to merge with unrated LG Semicon Co. as part of a government-sponsored
business recovery plan.  The rating of HSA is based on the credit quality of
Hyundai Electronics, which holds a 76% interest in the subsidiary.
    On Sept. 3, 1998, the Federation of Korean Industries, a lobbying group
for major business conglomerates (chaebol) in Korea, announced that the
Hyundai and LG groups had agreed to meld their semiconductor businesses,
forming one of the world's largest makers of dynamic random access memory
(DRAM) chips.  The planned merger is part of a Korean government initiative to
help the nation's sprawling chaebol shore up their finances.  Details the
merger have not been decided.  Meanwhile, uncertainties remain about whether
the merger will go through, as well as about the ultimate effect of the move
on the partner companies' cost structure and competitiveness.
    Both Hyundai Electronics and LG Semicon rely heavily on the DRAM business.
Amid sharp deterioration in the global DRAM market, both companies fell into
the red in the first six months of calendar year 1998.  During that period,
Hyundai Electronics recorded a net loss of Korea won (W) 330 billion, while
LG Semicon posted a net loss of W249 billion.  Such losses notwithstanding,
both companies were obliged to continue a high level of capital spending to
maintain their competitiveness in the global market.
    The merger may yield cost-saving economies of scale in terms of R&D,
administration, and marketing.  However, the new company would retain
substantial excess capacity, and would likely incur sizable capital
expenditures over the near to medium term to transition its plants to a common
manufacturing process.  The consolidation might also persuade certain
customers to diversify their supplier base.  As a result, considering the
current dismal state of the DRAM market, the new company may have to implement
large-scale operational restructuring, including painful layoffs.
    In resolving the CreditWatch, Standard & Poor's will assess the details
of the proposed merger as they become available, the earnings prospects of the
new company, and general conditions in the marketplace.  Standard & Poor's
will also consider the overall business mix of the Hyundai group, which is
increasingly in doubt both because of this merger and because of the clouded
outlook for Hyundai Motor Co., the core company of the chaebol, the ratings
agency said. --CreditWire