South Korea's Daewoo Motors faces bankruptcy

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The Independent Online

South Korea's Daewoo Motors is facing bankruptcy, putting creditors at a disadvantage as they try to negotiate sale of the ailing car maker to General Motors.

South Korea's Daewoo Motors is facing bankruptcy, putting creditors at a disadvantage as they try to negotiate sale of the ailing car maker to General Motors.

Creditors said if the South Korean carmaker goes bankrupt, it is expected to be put under court receivership - a procedure that will install new management and freeze all debts.

"Sale of Daewoo Motor to GM is likely to be delayed as there are time-consuming procedures in placing a bankrupt firm under court receivership," said Sohn Jong-won, an motor industry analyst at Good Morning Securities Ltd.

Sohn said the sale could also be delayed because Daewoo creditors would probably get a lower offer from the U.S. automaker.

Daewoo, which has been running on emergency bank funds, defaulted on nearly £30 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, a former symbol of the nation's economic expansion, has been on a debt-workout program since July 1999.

Last week, creditors stopped sending new funds to Daewoo, demanding that its union accept the dismissal of 18 percent of its 18,000 workers. But the union said it would not accept job cuts.

Daewoo managers and union leaders met for three hours Tuesday but failed to resolve the issue. Both sides planned to meet again later Tuesday. Korea Development Bank, Daewoo's main creditor, gave Daewoo and its union until Wednesday morning to reach an agreement and avoid bankruptcy.

"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 dlrs 155 million in commercial papers due this week but it has no financial resources to honor them.

If Daewoo Motors is put under court receivership, Daewoo's 250 main subcontractors could 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 Ltd.

Analysts said South Korea's two other once-troubled car firms - Kia Motors Corp. and Samsung Motors Inc. - were sold to Hyundai Motor Co. and Renault SA of France respectively after being put under court receivership.

GM entered the race to acquire Daewoo after Ford Motor Co. abruptly withdrew from negotiations in September. In hotly contested bidding early this year, GM reportedly offered between dlrs 4 billion and dlrs 5 billion.

Although heavily indebted, Daewoo could provide an easy way for foreign auto giants to crack open South Korea's 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.

The Daewoo crisis, as well as turmoil at cash-strapped Hyundai Engineering and Construction Co., the nation's biggest builder, have strained government efforts to restore investor confidence in the economy.

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 dlrs 1.4 billion due in commercial notes by year's end but it can muster only dlrs 1 billion to cover them.

To avoid the huge impact the builder's collapse may have on South Korea's economy, over the weekend creditors asked Hyundai Engineering's owner, Chung Mong-hun, to agree to capital reduction and a debt-for-equity swap.

Chung reportedly rejected the demand.

Hyundai creditors were scheduled to meet on Wednesday to discuss their common stand.

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