The Hyundai Group first began to reveal the extent of its difficulties in late May at the height of struggle over power within the Group between two of the sons of founder Chung Ju-yung. At that time, Hyundai Engineering & Construction (HEC) -- the largest contractor in South Korea -- faced liquidity problems. Its main creditor, Korea Exchange Bank (KEB), and three other banks rescued it at that point, but the picture for HEC has only grown darker since then, risk sources say.

Moreover, because of the linkages between the many arms of the Group -- which range from autos and shipbuilding to financial services and semiconductors – a weakness at one arm spells trouble for several of the others. Furthermore, one of the healthier parts of the conglomerate, shipbuilder Hyundai Heavy Industries, is locked in a debilitating legal dispute with its sister companies, Hyundai Electronics Industries and Hyundai Securities, over debts repaid on their behalf.

Risk sources argue that these disputes within the Group will only undermine the confidence the rest of the South Korean business world and Western investors would otherwise have in the Group’s management. These are the kinds of political issues that create credit problems, which then add to the cost of funding.

In fact, the Group’s creditors have already begun to act. On Monday, creditors refused to roll over bonds, commercial paper and loans for HEC. Up until that point, KEB has backed HEC, but an official of the bank warned HEC that the company's fate lays in its own restructuring efforts. The problem is that instead of streamlining operations in light of both the economic crisis that struck South Korea three years ago, and the Daewoo Group collapse about a year ago, Hyundai has plunged into an intra-family and intra-Group bickering—a demonstrating of priorities that will not sit well with investors and regulators.

And, Hyundai has few options for capital infusion. On Monday, a local credit ratings agency, Korea Management & Credit Corp., lowered the debt of HEC and Korea Industrial Development Co. to junk-bond levels, which not only greatly increases the cost of funding, but also eliminates a pool of investors that are only allowed to invest in investment-grade offerings. Another Korean credit rating agency did the same for Hyundai Petrochemical Co.

On top of this, risk analysts say that with local confidence sinking, similar action by foreign credit rating agencies is likely to follow. After the experience of watching Daewoo’s debt estimates rise over time, repeated assurances that all is well by Hyundai spokesmen are being greeted with skepticism at best and derision at worst in the investing community, according to risk sources.

The bond markets are not the only investor community that is spooked by Hyundai's troubles. With South Korea's stock market in a funk, any new stock issuances would likely flop and sales of securities will bring in far less than they would have had the company sold them a year ago. HEC is so desperate to remedy its liquidity problems that it is attempting to sell seemingly illiquid collateral in the form of a cement factory in Bangladesh and unpaid bonds from Iraq. One reason for the attempted liquidation is that HEC couldn't meet payroll for more than 7,000 employees on Tuesday, risk sources say.

Hyundai executives have not stemmed the credit concerns. Hyundai executives are reacting to the events with defensive responses and denials, according to risk experts. For example, HEC president Kim Yun-kyu maintained that the firm has "absolutely no problems with cash flow." A Group spokesman called the ratings downgrades "unreasonable." These statements were made on July 25. On July 27, HEC was requesting fresh loans in the vicinity of $161 million simply to pay for supplies to stay in business. Not surprisingly, the bank presidents of whom the money was requested disagreed among themselves about extending the loans. This sort of thing, risk experts contend, is eroding the credibility of the entire Hyundai Group.

South Korean government officials have not helped remedy the problem. For example, Minister of Finance and Economy Lee Hun-jai has been repeatedly quoted as saying that Hyundai's troubles are not as serious as they are made out to be. He said on July 25 that the Group's cash flow problems are actually improving.

Risk experts view such comments as a far cry from reality. They recall that South Korean government officials issued similarly sanguine statements in the fall of 1997, just weeks before South Korea received a $50 billion bailout from the International Monetary Fund (IMF). The South Korean government's credibility is not enhanced in the sovereign risk rating community by such evidence of unwarranted optimism.

Additionally, the implied threats issued by Minister of Finance and Economy’s Lee to the South Korean financial community of "ramifications" if it does not continue to roll over HEC's debts, only signals more confusion about the government's restructuring policies, risk experts say. On the one hand, the government has been pushing for banks and non-bank financial institutions to shore up their expertise in lending. On the other, the government is also suggesting that they will incur the wrath of the government -- long a powerful force on the South Korean banking scene -- if they do actually begin to function like true free market actors, by requiring that loans be repaid.

South Korea, risk experts argue, is even further behind than Japan in learning to let ailing corporates expire. Lee argues that the markets should be "patient." They are not, risk experts note.

Creditors of Hyundai Group held an emergency meeting to discuss the group's financial situation, after the engineering unit paid staff Wednesday after a one-day delay.

Banks will postpone payments on debt, while the unit proceeds with planned asset sales, according to an official at a creditor bank.

''Hyundai Engineering should have gone insolvent already, if only market principles were applied,'' said Seo Joon Hyuck, an analyst at Good Morning Securities Co. ''We know its problems very well by now, so investors don't expect too much.''